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Wednesday March 2, 2005 - 16:35:54 GMT
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Forex Market Commentary and Analysis (1 March 2005)

The euro came off sharply vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.3085 level, a major technical level. Stops were hit below the $1.3155 level, sending the pair to its lowest level since 22 February and to the 61.8% retracement of the 2005 U.S. dollar correction. A couple of key factors conspired against the euro today. First, the U.S. dollar notched solid gains across the board overnight after Reserve Bank of Australia hiked interest rates by 25bps tot 5.5% and was hawkish in its monetary policy statement. This action came the same day it was reported that Q4 GDP printed at 0.1%, much less-than-expected. Another factor that hurt the euro was a media report that the European Central Bank will trim its projection for eurozone economic growth in 2005 to 1.6% from 1.9%. This reported downward revision likely reflects the economic drag that Germany represents. Some media outlets are reporting the European Central Bank is using an average euro exchange rate of US$ 1.30 through 2007 to calculate its growth projections. The ECB will officially release its quarterly revisions tomorrow. Another euro-negative factor was yesterday’s report from Standard & Poors that Germany is “falling behind” its “AAA” rated peers in terms of fiscal and economic performance. Dealers also moved out of euros overnight ahead of congressional testimony from Fed Chairman Greenspan with some speculation he might hint Fed policymakers will drop “measured pace” from their future policy statements and tighten policy more aggressively. Greenspan’s comments focused largely on budget consolidation, national savings, and the funding of the U.S.’s mammoth deficits. The Fed chief said “there is very little evidence” that foreign investors are moving out of U.S. dollars but said it is “conceivable” foreign investors could pare their holdings of U.S. dollars. Regarding fiscal policy, Greenspan said the 2003 tax cuts have largely worked their way through the economy and cautioned against reducing taxes too much. In eurozone news, France today reaffirmed its commitment to achieving a deficit of 2.9% of GDP in 2005, down from 2004’s actual 3.7% deficit, while European Union’s Alumnia said he believes a revision to the Stability and Growth Pact will be agreed “soon.” ECB’s Issing reiterated central bankers’ warnings about reforming the Pact too much. Data released in the eurozone today saw EMU-12 PPI up 0.6% m/m and 3.9% y/y, above forecasts, while EMU-12 Q4 GDP was up 0.2% q/q and 1.6% y/y. Also, German January new orders for plant and machinery were off 2.0% y/y and core retail sales gained 2.1% m/m in January. In Fed news, Philadelphia Fed President Santomero said the Fed will “make every effort to keep price pressures well contained” but wanted “price dynamics are prone to shift” and said the U.S. dollar’s recent depreciation “may lessen the competitive pressure on domestic producers that has until now limited their pricing power.” Richmond Fed President Lacker last night said “ambiguity about the Fed’s long-run inflation intentions has outlived its usefulness” and said there is “no reason” the Fed should not adopt a formal inflation target. Euro bids are seen around the US$ 1.3090 level.


The yen lost ground vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥105.15 level and remained supported around the ¥104.30 level. The move above the ¥105.00 figure saw offers related to the pair’s recent ¥105.50/ ¥104.10 range and North American dealers quickly dropped the pair back to test technical bids around the ¥104.85 level. Data released in Japan overnight saw the February monetary base increase a mere 1.2% y/y, down from January’s 3.9% y/y pace and the slowest pace since March 2001. Bank of Japan has failed 33 times in 2005 to attract sufficient bids for its daily market operations and many traders are closely watching the central bank to see if it is forced to temporarily or permanently unwind its quantitative easing policy. BoJ adopted a quantitative easing policy four years ago and will likely keep it in place until there is evidence of consumer price inflation. BoJ Governor Fukui reiterated his commitment to maintaining the quantitative easing policy overnight but added zero per cent interest rates might be a burden on households. The strong move lower in the Australian dollar overnight also contributed to the yen’s weakness overnight. The Nikkei 225 stock index climbed 0.28% to close at ¥11,813.71. Dollar offers are cited around the ¥106.50 level. The euro extended recent losses vis-à-vis the yen as the single currency tested bids around the ¥137.30 level and was capped around the ¥137.95 level. Technically, the ¥137.25 level is a major support level and major stops are cited below. In Chinese news, China’s National Bureau of Statistics said there “exists no possibility of any serious inflation” and said a CPI below 4.0% is consistent with this view. China’s CPI was reported at 1.9% in January, down from 5.3% in July and August. The National Development and Reform Commission today predicted Chinese Q1 CPI would climb 2.5%.

The British pound came off sharply vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.9075 level and was capped around the $1.9215 level. Significant stops were hit below the $1.9135/ 05 levels, key areas of short-term technical support. Data released in the U.K. saw February construction PMI fall to 54.2 from 55.5 in January. Dealers await comments from Bank of England Monetary Policy Committee member Marian Bell at 1915 GMT today. MPC member Tucker has made headlines recently with his hawkish comments and traders want to see if any other policymakers are adopting a similar bias. Cable bids are cited around the $1.9065/ 05 levels. The euro was little changed vis-à-vis the British pound as the single currency tested bids around the ₤0.6850 level and tested offers around the ₤0.6870 level.


The Swiss franc came off vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.1775 level and was supported around the CHF 1.1650 level. Today’s intraday high represents the 50.0% retracement of the 2005 U.S. dollar correction. Stops were reached above the CHF 1.1730 level during the move. Swiss CPI and GDP data will be released tomorrow. The euro gained ground vis-à-vis the Swiss franc as the single currency tested offers around the CHF 1.5425 level.


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