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Wednesday March 16, 2005 - 15:21:20 GMT
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Forex Market Commentary and Analysis (16 March 2005)

The euro recovered lost ground vis-à-vis the U.S. dollar today and tested offers around the US$ 1.3430 level after Australasian dealers lifted the pair from the $1.3290 level. The pair didn’t trade far below the $1.3305 technical support line and remained above the $1.3285 level, a bullish indication that more euro appreciation is likely. The common currency moved above the $1.3400 figure during North American dealing after Q4 U.S. current account data were released that evidenced a deficit of US$ 187.9 billion, a worse-than-expected imbalance. These data mean the U.S.’s trade deficit rocketed to US$ 665.9 billion in 2004, an all-time high and some 25.5% above 2003’s US$ 530.7 billion deficit. Notably, the Q4 deficit was 13.3% larger than Q3’s deficit. Treasury International Capital data released yesterday confirmed the U.S. easily financed its massive trade deficit in January but these data series have become increasingly important as the dollar plumbs to new levels. A speech given by Nobel Laureate and former World Bank Chief Economist Stiglitz drew attention yesterday when he predicted the U.S. dollar will cease to be the world’s reserve currency. Stiglitz suggested the U.S. dollar will lose its attractiveness, just as sterling and gold did in the last century, and names the euro and possibly the yuan as more attractive replacements. Other U.S. economic data released today saw February new home construction rose 0.5% to 2.192 million units, its fastest pace in 21 years. These housing data were tempered, however, by a 2.7% decline in building permits. European Central Bank President Trichet today said he foresees moderate EMU-12 economic growth while French Finance Minister Breton indicated he sees economic growth between 2.0% and 2.5%. Data released in the eurozone today saw EMU-12 February HICP upwardly revised to 2.1% y/y from 2.0% y/y, up from January’s 1.9% print. ECB officials avoided comment on media speculation that the ECB would tighten policy by September. Ukraine official Teriokhin added his voice to global monetary and economic policymakers who note they are likely to sell dollars in favour of euros. Euro bids are cited around the $1.3280 level.


The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥103.90 level after failing to get above the ¥104.70 level during Australasian dealing. Stops were hit below the ¥104.25 level during European dealing, the 50% retracement level of the 2005 range. Chartists are now eyeing the ¥103.65/ 102.90 levels as important dollar support levels. Bank of Japan’s Policy Board left monetary policy unchanged by a unanimous decision, as expected, and it upgraded its assessment of the economy for the first time in several months. The Japanese government kept its assessment of the economy unchanged for a third consecutive month and highlighted economic difficulties as being “an adjustment phase” ahead of an economic pick-up later this year. Economic risk factors continue to include an inventory adjustment in information technology, steel prices, and crude oil prices. Economy Minister Takenaka today said the government and central bank share the same assessment of the economy. BoJ Governor Fukui reiterated the central bank will maintain its long-standing quantitative easing policy until CPI stabilizes and said the removal of a blanket government guarantee on bank account deposits next month does not worry him. The government will guarantee ¥10,000,000 in every account from 1 April. Data released in Japan overnight saw the leading indicator diffusion index revised to 54.5 from 55.0 while the coincident diffusion index was revised to 90.0 from 88.9. Dealers are noting that we are two weeks away from Japan’s fiscal year-end and the markets have not yet focused on yen repatriation inflows as a possible dollar-selling pressure. The Nikkei 225 stock index climbed 0.44% to close at ¥11,873.18. Dollar offers are seen around the ¥104.85 level. The euro gained ground vis-à-vis the yen as the single currency tested offers around the ¥139.70 level and was supported around the ¥138.85 level. Euro bids are cited around the ¥138.70/ 50 levels with stops below that area. The British pound gained ground vis-à-vis the yen as sterling tested offers around the ¥200.65 level and remained supported around the ¥199.65 level. In Chinese news, People’s Bank of China established a floor of 5.51% for certain types of housing loans and announced it is reducing the interest it pays on excess reserve deposits from commercial banks to 0.99% from 1.62%. PBOC also reported commodity prices climbed 4.8% y/y last month, up from January’s 4.7% y/y level. The State Administration of Foreign Exchange (SAFE) reported China’s foreign debt rose 18.06% to US$ 228.6 billion at the end of 2004 and total outstanding debt is now equal to 13.86% of GDP. PBOC Governor Zhou today said China will keep its managed floating exchange rate mechanism “in place,” defying speculation it would soon modify the system.

The British pound reversed course and exploded higher vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.9280 level after testing technical support around the $1.9110 level during Australasian dealing. Data released in the U.K. today saw the February unemployment claimant count print at -700 while the January total was revised to -10,200 from -8,300. Also, headline average earnings remained steady m/m at 4.4%. The ILO unemployment total grew +22,000 q/q in the November – January period. Overall, the U.K. labour market remains tight with not a lot of slack, but the beleaguered manufacturing sector continues to experience problems and has lost some one million jobs since Blair’s Labour government came to power in 1997. Chancellor of the Exchequer Brown gave his Budget speech today and predicted the U.K. economy will grow between 3.0% and 3.5% in 2005, defying critics who see a growth rate of 2.5%. A growth rate of 2.5% to 3.0% is predicted by Brown for 2006. Regarding inflation, Brown said inflation will rise 1.75% in 2005, below Bank of England’s 2.0% target rate. On the fiscal front, Brown remains confident that he can meet his “Golden Rule” of balancing the budget over the course of the economic cycle. Concerning the euro, Brown said his Treasury will not recommend accession at this time. Cable bids are cited around the US$ 1.9110/ $1.9030 level. The euro was little changed vis-à-vis the British pound as the single currency tested offers around the ₤0.6965 level and was supported around the ₤0.6940 level.


The Swiss franc moved sharply higher vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.1500 figure after hitting stops below the CHF 1.1620 and CHF 1.1570 levels. The pair traded within a few pips of a CHF 1.14 handle and many dealers believe it is only a matter of time before the dollar tests new multi-month lows. Swiss National Bank will release its quarterly monetary policy decision tomorrow and SNB President Roth will likely speak then as well. Dollar offers are seen around the CHF 1.1560 level. The euro came off vis-à-vis the Swiss franc as the single currency tested bids around the CHF 1.5450 level while the British pound weakened and tested bids around the CHF 2.2175 level.


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