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Friday December 31, 2004 - 15:15:02 GMT
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Forex Market Commentary and Analysis (31 December 2004)

The euro managed to hold its head above the US$ 1.3600 figure for most of the trading day but the single currency stopped just short of establishing a fresh lifetime high. The pair was capped around the $1.3660 level and traded around the $1.3590 level before reclaiming the $1.3600 figure. The pair gained more than 8.02% on the year and traded as low as the $1.1760 level in April. Economic growth in the U.S. and employment continue to outpace those indicators in the eurozone but traders remained focused on the U.S.’s mammoth budget deficit and current account deficit. The former stands at more than US$ 400 billion with the public debt now in excess of US$ 7.53 trillion. The latter now stands at 5.6% of GDP, compared with a German current account surplus of just less than 4%. It is clear trades are concerned with the U.S.’s ability to finance these deficits. Traders also sold dollars at an elevated rate in 2004 following the re-election of President Bush. His administration has publicly championed “a strong U.S. dollar that is determined by open and competitive markets.” Most dealers, however, liken this to a policy of benign neglect and the lack of any commentary about concerted intervention with U.S. authorities has also pressured the greenback. Traders sold more dollars yesterday after the December Chicago purchasing managers’ index fell to 61.2 fro, 65.2 in November, below expectations. The employment component fell surprisingly from 60.8 to 49.1 and this is what caught traders’ attention. Market participants generally expect the Federal Reserve to continue tightening policy at a “gradual” pace in 2005. Euro bids are seen around the $1.3560 level.


The yen appreciated vis-à-vis the U.S. dollar on the last trading day of 2004 with the greenback testing bids around the ¥102.40 level after encountering offers around the ¥103.15 level. The 2004 low in the pair is ¥101.85 and bids from Bank of Japan are said to be lined up below the ¥102.00 figure to protect this level from being tested again. Bank of Japan has not overly conducted yen-selling intervention in the market since early 2004, possibly in MoF deference to President Bush during his election year. The pair lost 4.2% this year but has fallen more than twelve big figures since May when it tested the ¥114.95 level. Japanese authorities will likely continue to verbally intervene as and when needed with finance minister Tanigaki and MoF currency boss Watanabe vowing “appropriate action.” Monetary authorities likely understand that a weaker dollar is structural and cannot be stopped, but they will likely try to manage the speed of that adjustment. Many traders believe the pair will trade below parity in 2005 given the fact we are a mere two big figures from there now. One question that economists pose is whether or not Bank of Japan will start to unwind its long-standing quantitative easing policy in 2005. Deflation continues to nag the Japanese economy and BoJ will not unwind its quantitative easing policy until there are successive months of positive inflation in the economy. Dollar offers are cited around the ¥103.20 level. The euro shed some of its recent gains and tested bids around the ¥139.45 level after testing offers around the ¥140.60 level. Euro bids are cited around the ¥139.20 level.

The British pound rebounded today and moved higher vis-à-vis the U.S. dollar, testing offers around the US$ 1.9350 level and remaining supported around the $1.9210 level. Cable has notched a 7.95% gain in 2004 and traded at a decade-plus high of $1.9550 in mid-December. The U.K.’s current account deficit is less than half of the U.S. deficit – relative to their respective GDPs – and ten year gilts still have 75bps of premium over corresponding U.S. Treasuries. The outlook for the pound is not rosy, however, as recent housing data point to a deceleration in that sector of the U.K.’s economy. This is likely to have an appreciable impact on the pound in 2005. The manufacturing sector remains unstable at best and many economists of Chancellor Brown’s economic forecasts for 2005, suggesting they are over-optimisitic. Cable bids are cited around the $1.9170 level. The euro came off vis-à-vis the British pound as the single currency tested bids around the ₤0.7045 level and was capped around the ₤0.7085 level. The cross recently traded with a ₤0.71 handle and continued decoupling between the euro and pound will likely see more appreciation.


The Swiss franc gained 9.61% vis-à-vis the U.S. dollar in 2004, surpassing the euro’s gains. After trading around the CHF 1.3225 in April, the dollar fell from its glory and its depreciation accelerated through the CHF 1.25 and CHF 1.20 figures in the fourth quarter. The continued violence in Iraq and elevated prices of commodities like gold and oil saw traders move into Swissy as a safe-haven play during different periods of the year. Swiss National Bank opted to not alter its monetary policy at its year-ending monetary policy meeting a couple of weeks ago but acknowledged that interest rates will continue to move higher as the Swiss economy continues to recover. The pair briefly traded at multi-year lows with a CHF 1.12 handle the last couple of trading days of the year. Dollar offers are cited around the CHF 1.1370 level. The euro was rangebound vis-à-vis the Swiss franc as the cross tested bids around the CHF 1.5415 level and was capped around the CHF 1.5460 level. The cross traded as high as the CHF 1.5870 level in March and as low as the $1.5040 level in June. Traders believe the Swiss National Bank is relatively comfortable with the cross above the CHF 1.5000 figure.


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