Wednesday February 2, 2005 - 19:27:05 GMT
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Forex Market Commentary and Analysis (2 February 2005)
The euro came off vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.3095 level but was pushed lower to the $1.3025 level during North American dealing. Traders positioned themselves ahead of the Federal Open Market Committee’s interest rate decision, expecting the Fed to raise the federal funds target rate by 25bps to 2.5%. The FOMC’s actions matched the market’s expectations and the statement was virtually identical to the previous statement. Policymakers noted “The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. Output appears to be growing at a moderate pace despite the rise in energy prices, and labor market conditions continue to improve gradually. Inflation and longer-term inflation expectations remain well contained. The Committee perceives the upside and downside risks to the attainment of both sustainable growth and price stability for the next few quarters to be roughly equal. With underlying inflation expected to be relatively low, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.” In other Fed news, Chairman Greenspan is expected to make a speech about the U.S. current account deficit on Friday in London. Traders remember how Greenspan’s remarks in Berlin in November on this topic moved the markets and will be paying close attention to his statements this time around. U.S. January non-farm payrolls are scheduled for release on Friday and most forecasts are predicting new job creation of around 175,000 persons. Traders are not anticipating any major fireworks at this G7 meeting as the improbability of yuan liberalization by China has been factored in. Most dealers expect the G7 to reiterate last year’s Boca Raton statement about the need to avoid FX volatility and maintain orderly currency movements. President Bush’s State of the Union address will also be closely watched by traders tonight and there are initial indications he may seek to limit new spending to 0.8%, ex-defense. Market participants are also interested to learn if the geopolitical hawkishness in his inaugural address will resurface. Data released in the eurozone today saw German unemployment escalate to its highest recorded level since 1933. The German government reformed some labour market statistical practices, accounting for some of the increase, but it was still notable that the jobless total printed at 5.037 million for last month. European Central Bank’s Governing Council will convene tomorrow and is expected to keep its repo rate target unchanged at 2.0%, meaning U.S. assets have a clear and positive interest rate differential over eurozone assets. The European Commission today said “France, Germany, and Italy…must pursue budgetary consolidation…” but this warning is likely falling on deaf ears given that Stability Pact reform is expected by next month. Other data released in the eurozone today saw December PPI off 0.2% m/m and up 3.6% y/y. Additionally, German retail sales receded 0.3% m/m and 2.7% y/y in December, the lowest level of retail sales in ten years. Euro bids are cited around the US$ 1.2970 level.
The yen traded in a narrow range vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥103.40 level and was capped around the ¥103.85 level during early European dealing. The pair came off to the ¥103.50 level during European dealing and was temporarily supported by the 100-hour moving average, only to move to intraday lows during early North American dealing. The pair has been confined to a narrow 100-pip range since 28 January as traders await direction from a myriad of events this week including the G7 meeting, January U.S. non-farm payrolls, and Greenspan’s speech. Data released in Japan overnight saw the December monetary base up 3.9% y/y compared with 4.2% in December. Also, December steel exports were reported off 5.6% y/y with 2004 steel exports climbing 2.6%. This is a very quite weak for Japanese economic data thus most of the focus will be on any comments about Asian currency regimes by G7 policymakers on Friday or this weekend. The Nikkei 225 stock index gained 0.20% to close at ¥11,407.14. Dollar offers are cited around the ¥104.25 level. The euro briefly tested the ¥135.80 level during early European dealing but could not sustain early gains and receded to the ¥135.15 level during early North American dealing. In Chinese news, a German government source today said G7 officials should not pressure China this weekend regarding exchange rate flexibility. U.S. Treasury undersecretary Taylor said he expects “candid” discussions with China about its FX regime. In other China news, National Development and Reform Commission’s Ma Kai hawkishly said “there is no question when macroeconomic controls might end,” suggesting China will continue to try to prevent the economy from overheating.
The British pound was little changed vis-à-vis the U.S. dollar today as the greenback tested offers around the US$ 1.8890 level and was supported around the $1.8825 level. Stops were triggered below the $1.8850 level during North American dealing but buying interest emerged around the $1.8830 level. Data released in the U.K. today saw the CIPS construction PMI print at 55.2 in January, down from January’s 57.2 level. The new orders sub-index fell to 55.6 from December’s 57.0 level. London will play host to this weekend’s G7 meeting so traders can expect Chancellor of the Exchequer Brown to promote his pet projects like debt forgiveness and debt moratoriums. Cable bids are cited around the US$ 1.8820 level. The euro came off vis-à-vis the British pound as the single currency tested bids around the ₤0.6905 level and was capped around the ₤0.6950 level.
The Swiss franc lost ground vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.1955 level and was supported around the CHF 1.1855 level. The pair made a strong move during North American dealing, triggering stops above the CHF 1.1895 level and rocketing to the CHF 1.1950 level. Swiss CPI and trade data will be released tomorrow. Dollar offers are cited around the CHF 1.2035 level. The euro climbed marginally vis-à-vis the Swiss franc as the single currency tested offers around the CHF 1.5560 level and was supported around the CHF 1.5510 level.
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