Tuesday January 18, 2005 - 16:52:37 GMT
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FX Market Commentary and Analysis (18 January 2005)
The euro extended recent losses vis-à-vis the U.S. dollar today as the single currency tested offers fell to a two-month low against the greenback. The pair briefly printed around the $1.2995 level during North American dealing after the release of much stronger-than-expected U.S. November Treasury International Capital (TIC) data. These data showed that the U.S. more-than-covered its trade deficit two months ago with capital inflows from foreign sources. Foreign purchases of U.S. securities reached a net US$ 99.7 billion, relative to US$ 65.4 billion in October, with private net flows gaining $71.8 billion in November and net private purchases of Treasury bonds and notes up US$ 5.8 billion to $11.0 billion. Official net purchases of U.S. securities reached $27.9 billion in November, up from October’s reading of $14.9 billion. These data are important because Fed Chairman Greenspan in November said the U.S. may experience difficulties bridging its current account and trade deficits in the future. This would put upward pressure on U.S. interest rates and likely cause the U.S. dollar to depreciate. Traders cite the improving U.S. yield differential over eurozone assets as another reason why the dollar has been bid higher. The Fed is expected to next raise interest rates in early February. Many Fed speakers were on the wire today with Philadelphia Fed’s Santomero saying he expects rates to continue to move higher “at a measured pace.” The major question on traders’ minds now is whether or not the G7 will up the pressure on Asian countries to liberalize their capital accounts when policymakers convene in London next month. Other data released in the U.S. today saw the Empire State manufacturing index recede to 20.1 in January from a revised 27.1 in December. Data released in the eurozone today saw EMU-12 labour costs up 1.9% y/y in Q3, down from a preliminary 2.0% print, while November industrial output was off 0.3% m/m and up 0.5% y/y. In other eurozone news, it was reported Ecofin finance ministers suspended disciplinary measures against France for its breach of the EU’s Stability and Growth Pact but have decided to take action against Greece for similar problems. European officials have recently hinted a deal to reform the Pact could be unveiled before March. Euro bids are seen around the US$ 1.2975 level.
The yen lost ground vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥103.05 level and remained supported around the ¥102.10 level. Traders were unable to take the pair back to the ¥101 handle where major stops are said to be in place below the ¥101.80 and ¥101.30 levels. Data released in Japan overnight saw the November index of leading economic indicators upwardly revised to 36.4 from a preliminary reading of 30.0. This represents the third consecutive month the figure has been below the “boom-or-bust” 50.0 level. The coincident index was upwardly revised to 60.0 from the preliminary print at 44.4 – the first time in four months it has been above the 50.0 level. Other data released in Japan today saw the NRI consumer sentiment index at 142 in December from 143 in October. Also, Japan’s crude steel production gained 2.0% to 112.68 million tons, the highest level since 1974. Traders are pointing to the bitter cold snap in parts of the central and eastern U.S. as reasons why the yen has fallen today as front-month crude futures have topped the US$ 49.00 figure. Japan is heavily dependent on imported oil products and the yen exhibited a strong negative correlation with crude prices at times in 2004. The Nikkei 225 stock index lost 0.56% to close at ¥11,423.26 today. Dollar offers are cited around the ¥103.25 level. The euro gained ground vis-à-vis the yen as traders covered their shorts and pushed the pair as high as the ¥134.40 level. In Chinese news, People’s Bank of China indicated it is experiencing difficulties in conducting open market operations and may implement additional tools to adjust the money supply. One likely tool would be an increase in reserve requirements from the current 7.5% level. One estimate suggests the PBOC may have lost RMB 15 – 20 billion in 2004 on account of open market operations.
The British pound appreciated vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.8740 level and was supported around the US$ 1.8525 level. The gains were precipitated by a pick-up in U.K. inflation with price pressures accelerating to 0.5% last month – the fastest pace since June 2004 – with the annual rate up 1.6%. These data will make it difficult for Bank of England’s Monetary Policy Committee to consider lowering rates at this time. RICS data released overnight saw house prices decline in December but that the rate of decline leveled out to its slowest pace in three months. The U.K. housing market will continue to slow down and traders are curious to see if the slowdown becomes a crash. Cable bids are cited around the US$ 1.8650 level. The euro came off vis-à-vis the British pound as the cross tested bids around the ₤0.6965 level.
The Swiss franc lost moderate ground vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.1905 level and was supported around the CHF 1.1805 level. Data released in Switzerland today saw December producer and import prices off 0.4% m/m and up 1.5% y/y. An average of all monthly changes in 2004 shows that the index gained 1.1% last year – the first rise since 2000. Dollar offers are seen around the CHF 1.1930 level. The euro came off vis-à-vis the Swiss franc as the single currency tested bids around the CHF 1.5420 level.
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