Wednesday January 26, 2005 - 14:27:13 GMT
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Forex Market Commentary and Analysis (25 January 2005)
The euro retraced some of yesterday’s losses vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.3035 level during North American dealing. The pair has been fairly well-bid throughout the day as Australasian dealers managed to challenge the psychologically-important $1.3000 figure and European dealers kept the pair moving higher from the $1.2970 level. Data released in the eurozone today saw the January Ifo business climate index rise to 96.4 from 96.2 in December – its highest reading since February 2004 and right around expectations. The business assessment index receded to 95.3 from 96.0 in December and the business expectations index climbed to 97.6 from 96.5 last month. Also, the EMU-12 current account surplus printed at €400 million in November, down from €1.4 billion in October. December French large retail sale prices were off 0.2% m/m and 0.4% y/y. There was some intense criticism of the U.S. economy by noted global economists at introductory sessions of the Davos World Economic Forum. Morgan Stanley’s Roach said “self-indulgent” U.S. consumers are the “weakest link” in the global economy even though U.S. consumption was the driving factor behind global economic growth last year. Roach said U.S. consumers “suck money” out of their homes to spend on imports from Asia which in turn buys U.S. dollars and keeps U.S. interest rates low. Roach said the Federal Reserve remains in denial about this phenomenon. The Federal Open Market Committee will convene next week and is widely expected to raise interest rates by 25bps to 2.5%. This would increase the positive yield differential over eurozone and Japanese assets. Interestingly, PIMCO Managing Director McCulley is publicly predicting the Fed will stop raising rates in 2005 when the federal funds target rate is no higher than 3.0%. This is generally on the low end of economists’ forecasts and given that PIMCO is the world’s largest bond market player, may explain the surprisingly low interest rates in the U.S. Data released in the U.S. today saw mortgage application volumes fall 3.6% w/w. Traders await Friday’s U.S. GDP and PCE deflator data. Euro bids are seen around the $1.2950 level.
The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥103.25 level after failing to get through the ¥104.15 level overnight. Stops were reached below the ¥103.75 level during Australasian dealing and the pair found some technical support during early North American dealing. Data released in Japan overnight saw its merchandise trade surplus reach its highest level in five years in 2004 following soaring exports to Asia. The merchandise trade surplus climbed 17.9% y/y to ¥12.01 trillion – the fourth consecutive year of expansion with exports to China up 20.5% y/y and imports from China up 16/8% y/y. Greater China officially replaced the U.S. as Japan’s largest trading partner but exports to the U.S. rose 2.3% to ¥13.72 trillion, the first rise in two years. Despite these strong trade data, some economists believe net exports will not be making a positive contribution to Japanese GDP data for a while on account on elevated commodity prices and inventory readjustments. It is probable that Japan experienced negative GDP growth in Q4 as the December trade surplus was off 3.9% m/m and up only 1.8% y/y. Other data released overnight saw the December corporate service price index fall 0.2% m/m. The Japanese government left its assessment of the economy for the November – January period unchanged for the fourth consecutive quarter. The MoF reported the economy is making a “gradual recovery” despite weakness in some sectors like information technology. The Nikkei 225 stock index gained 0.88% to close at ¥11,376.57. Dollar offers are cited around the ¥104.45 level. The euro tumbled vis-à-vis the yen as the single currency tested bids around the ¥134.25 level and was capped around the ¥135.10 level. The cross remains below the ¥134.95 technical resistance level. In Chinese news, a comment from a Chinese official led to yen gains across the board. The official said there would be “deep dialogue” about the yuan at next week’s G7 meeting in London, at which China will be a participant. China is unlikely to revalue the yuan soon, but the comment caught some traders off-guard because U.S. and European officials have recently downplayed the likelihood of official comments about the yuan at the meeting. Still, it is likely policymakers will seek to recertify the Boca Raton G7 statement about exchange rates from one year ago. Separately, a Chinese government economist said China will not meet its target regarding issuance of ¥2.5 trillion in new loans this year.
The British pound jumped sharply vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.8815 level and was supported around the $1.8635 level during Australasian dealing. Data released in the U.K. today saw Q4 GDP rise 0.7% q/q, above expectations and above its so-called trend rate of growth. Traders were largely pessimistic ahead of the number following Friday’s surprisingly weak December retail sales print but were reinvigorated by today’s news. On an annualized basis, economic growth reached 2.8%, lower than Q3’s 3.1% rate but higher than forecasts for a 2.7% rise. The other big news out of the U.K. today focused on the minutes from Bank of England Monetary Policy Committee’s January rate-setting meetings. Unlike the December MPC meeting, policymakers did not discuss lower rates, leading some to believe the forecasts in the November quarterly Inflation report are on track. Other data released today saw Hometrack house prices fall 0.4% this month, the seventh consecutive month of lower prices. Traders await similar data from Nationwide tomorrow. Cable bids are seen around the $1.8650 level. The euro weakened further vis-à-vis the British pound as the single currency tested bids around the ₤0.6920 level and was capped around the ₤0.6965 level.
The Swiss franc gained ground vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.1860 level and was capped around the CHF 1.1940 level. Stops were triggered below the CHF 1.1890 level during North American dealing. Traders await the release of SECO economic forecasts on Friday. Dollar offers are cited around the CHF 1.1970 level. The euro moved marginally higher vis-à-vis the Swiss franc as the single currency tested offers around the CHF 1.5510 level and was supported around the CHF 1.5470 level.
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