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Wednesday March 23, 2005 - 15:17:56 GMT
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Forex Market Commentary and Analysis (23 March 2005)

The euro extended its recent pullback vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.2985 level, its lowest level since 16 February. The pair failed get back above the $1.3085 level, the 38.2% retracement level of the 2005 range and technicians cite this as a bearish indicator. Several factors contributed to the dollar’s rampage. First, the Federal Open Market Committee raised the federal funds target rate by 25bps to 2.75%, as expected, but it accompanying policy statement focused more intently on inflation. The FOMC reported “Output evidently continues to grow at a solid pace despite the rise in energy prices, and labor market conditions continue to improve gradually. Though longer-term inflation expectations remain well contained, pressures on inflation have picked up in recent months and pricing power is more evident. The rise in energy prices, however, has not notably fed through to core consumer prices.” Trades bought dollars on the premise that interest rate differentials between the U.S. and eurozone would widen further to the dollar’s benefit. Second, the Fed may have gotten ahead of itself yesterday as CPI data were released today that evidenced the sharpest pick-up in inflation in several months. February headline consumer price inflation +0.4% m/m while the core rate climbed +0.3%, both higher-than-expected. The headline increase was +3.0% y/y while the core rate was up 2.4% y/y. Collectively, these data suggest the Fed will continue to tighten monetary policy and Fed-watchers are not ruling out a 50bps increase in rates by the Fed. Additionally, many traders believe the Fed will continue to hike borrowing costs through at least the end of 2005, if not the end of 2006. The benchmark ten-year U.S. Treasury yield is trading around a 4.68% yield in the wake of the Fed’s move and today’s CPI data. Third, tension abounds between the European Central Bank and Ecofin finance ministers regarding the latter’s decision to water down the EU’s Stability and Growth Pact this weekend. ECB officials are threatening that this maneuver will lead to higher interest rates in the eurozone and this would likely suppress the already weak growth rate in the eurozone. Fourth, the German Ifo business confidence index surprisingly fell in March, receding to 94.0 from 95.4 in February. Notably, the future expectations and current conditions sub-indices both receded in March. Other data released today saw EMU-12 January industrial orders fall 5.8% m/m and climb 8.2% y/y while the January trade deficit printed at €2.2 billion from a revised €5.1 billion surplus in December. The EMU-12 January current account surplus came in at €3.2 billion from €2.8 billion in December. Traders also paid attention to fairly bearish statements from German finance minister Eichel and Ifo official Nerb about Germany’s economy. Euro bids are cited around the $1.2945/ 35 levels.


The yen lost marginal ground vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥105.85 level and remained bid above the ¥105.25 level, approximately the 50% retracement of the depreciation from ¥106.85 to ¥103.60. Chartists are interested to see if the pair can remain above the ¥105.60/55 level, the 38.2% retracement of the ¥111.70/ 101.80 range. Data released in Japan today saw the February trade surplus up 7.7% m/m and down 21.7% y/y. Escalating import prices and growth are contributing to the continued deceleration in Japan’s trade surplus. MoF today conceded the trade surplus is “not likely to increase rapidly in coming months.” Notably, Japan’s crude oil imports rocketed 20.4% y/y in value last month despite a decline in import volume. Bank of Japan Governor Fukui spoke overnight and said the central bank does not try to control long-term rates with monetary policy but added he wants interest rates to reflect fundamentals. Economy minister Tanigaki today said the “stronger economy” is leading to higher interest rates but said speculation about higher rates is not desirable. The benchmark ten-year JGB is currently trading around a 1.5% yield, near a 2005 high. Other data released overnight saw nationwide land prices decline 5.0% in 2004, the fourteenth year of decline. The Nikkei 225 stock index came off 0.87% to close at ¥11,739.12. Dollar offers are cited around the ¥106.75 level. The euro came off vis-à-vis the yen a the single currency tested bids around the ¥137.30 level and was capped around the ¥138.20 level. The ¥137.25 level remains a major 50% retracement level of the 2005 range. The British pound and Swiss franc also weakened vis-à-vis the yen today as they tested bids around the ¥197.60 and ¥88.25 respectively. In Chinese news, People’s Bank of China refuted a media report that it plans to tighten monetary policy in Q2. PBOC Governor Zhou was quoted as saying the consumer price index will move higher in Q2 but did not say the central bank would raise rates.

The British pound shed significant ground vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.8695 level and was capped around the $1.8885 level. The daily low has coincided with a 76.4% retracement of the appreciative move from $1.8500 to $1.9320. Cable has now shed more than four cents this week and continues to be the driver lower in its cross rates. Minutes from Bank of England Monetary Policy Committee’s March meeting were released today and they evidenced a 7-2 vote to keep policy unchanged. MPC’s Tucker and Large voted to hike rates this month but most policymakers maintained a wait-and-see attitude regarding interest rates. Data released today saw Q4 economic growth unrevised at 0.7% q/q and 2.9% y/y and this means the U.K. economy expanded 3.1% in 2004. Other data released today saw the Q4 current account deficit at ₤5.046 billion compared with ₤9.445 billion in Q3. The CBI’s industrial trends survey was also released today and evidenced a worsening of orders and output activity in March. Cable bids are cited around the $1.8660 level. The euro gained a small amount of ground vis-à-vis the British pound as the single currency tested offers around the ₤0.6960 level and tested bids around the ₤0.6920 level.


The Swiss franc moved lower vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.1980 level and remained supported around the CHF 1.1875 level. Swiss financial markets are expected to be quiet through the end of the holiday week. Dollar offers are seen around the CHF 1.2030 level. The euro gained marginal ground vis-à-vis the Swiss franc as the single currency tested offers around the CHF 1.5565 level while the British pound tested bids around the CHF 2.2320 level.


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