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Wednesday May 11, 2005 - 14:01:21 GMT
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Forex Market Commentary and Analysis (11 May 2005)

The euro moved sharply lower vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.2785 level and was capped around the $1.2915 level. The move lower became accelerated during early North American dealing after the released of a less-than-expected March U.S. trade deficit that printed at –US$ 54.99 billion, considerably less than estimates around –US$ 61.5 billion. Notably, the U.S.’s trade deficit with China was reduced by a yard from –US$ 13.9 billion to –US$ 12.9 billion. Today’s data suggest preliminary Q1 U.S. GDP data may be upwardly revised and traders now look to next week’s Treasury International Capital data to determine if international portfolio inflows covered the US$ 54.99 billion trade deficit two months ago. Other data released in the U.S. today saw mortgage application activity rise 9.4% w/w in the week ended 6 May, an indication that the Fed’s interest rate hike last week may not have dented demand in the U.S. housing sector. Kansas City Fed President Hoenig yesterday said inflationary pressures have moved higher and added recent economic weakness will be transitory, comments echoed by Dallas Fed President Fisher. St. Louis Fed President Poole speculated that April retail sales that are scheduled for release tomorrow may have realized sizable gains. In the eurozone, German final April CPI was up 0.1% m/m and 1.6% y/y while final HICP was upwardly revised to unchanged m/m and +1.4% y/y. Germany’s DIW economic institute today reduced its German Q1 GDP forecast to +0.6% q/q from +0.7% q/q and it is predicting the German economy will expand +0.4% q/q in Q2. Other eurozone data released today saw French March industrial output fall 0.5% m/m. European Central Bank policymaker Caruana said current EMU-12 interest rates are appropriate and cited the eurozone as the lagging component of the international economy. Euro bids are seen around the US$ 1.2765 level and euro offers are seen around the $1.2845 level.


The yen lost ground vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥105.75 level and was supported around the ¥104.85 level. The big news story in Asia today was a story in the online edition of China’s People’s Daily newspaper that reported the Chinese yuan’s trading band would be widened by 1.26% in an announcement to be made next week, and 6.03% in one year. A People’s Bank of China official quickly refuted the story, and it was reported an erroneous translation from 7 May comments made by a Hongkong official led to the mistake. Traders, however, reacted by buying Asian currencies and decisively drove the dollar through the ¥105.00 figure. The pair later recovered to the ¥105.75 level after the release of a less-than-expected U.S. March trade gap. The yen rallied on the initial story because the prospect of a stronger Chinese yuan suggests Asian countries – including Japan - may purchase fewer U.S. dollars to artificially devalue their currencies. Data released in Japan today saw the March leading economic index print at 30.2, up from February’s 18.2 level, while the coincident index came in at 66.7. Other data released today saw foreign exchange reserves rise US$ 5.88 billion in April to $843.6 billion, the first increase in four months. This means Japan has maintained the world’s top slot as the official largest holder of foreign exchange reserves for the 65th consecutive month. Japan’s MoF today reported it did not intervene during the month of April and it has now been more than one year since Japan has overtly conducted yen-selling intervention in the market. A Nikkei report today suggests the MoF may approve Bank of Japan’s plans to accumulate more foreign exchange reserves beyond the legal requirement. BoJ has reportedly asked the MoF if it can allocate 10% of its ¥194 billion in fiscal year 2004 surplus funds for its legal reserves, twice more than the obligatory 5.0% requirement. Japan-watchers believe the government may approve such a move as it would be seen as an extension of Japan’s long-standing quantitative easing policy. The Nikkei 225 stock index shed 0.35% to close at ¥11,120.70. Dollar bids are seen around the ¥105.30 level and dollar offers are seen just below the ¥106.00 figure. The euro came off vis-à-vis the yen as the single currency tested bids around the ¥134.95 level and was capped around the ¥136.20 level. Technically, today’s high coincided with the 38.2% retracement level of the move from ¥141.60 to ¥132.95 and today’s low coincides with a 23.6% retracement of the same range. In Chinese news, the aforementioned revaluation story was the driver of the day and has traders in most world financial markets anxious. China later added it will not reform its yuan exchange rate next week when China it permits eight new currency pairs to be traded via its Shanghai-based FX dealing market, squashing speculation about a move on 18 May. Commercial bank Standard Chartered predicts China will widen both sides of the yuan’s trading band by 3% in Q2. The U.S. Congress is exploring legislation that would impose protectionist measures against certain Chinese products if China does not revalue by July. Europe, on the other hand, has today called on China to imports “voluntary curbs” on certain products. People’s Bank of China Deputy Governor Wu Xiaoling today said the U.S.’s planned measures to impose penalties could be delaying Chinese revaluation, adding PBOC is “technically” prepared to effect currency reforms.

The British pound extended recent losses vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.8720 level and was capped around the $1.8910 level. Stops were reached below the US$ 1.8765/ 60 level during the move lower and today’s low is the pair’s lowest print since 8 April. Bank of England released its quarterly inflation report today in which the central bank was noticeably more dovish than traders had expected. The central bank placed more emphasis on downside risks in today’s report than it did in February’s report, increasing the possibility of a reduction in interest rates and rendering further monetary contraction unlikely. Short sterling interest rate futures are now pricing in the likelihood of a cut in U.K. rates by the end of the year. The report said it expects CPI inflation to move above 2.0% in the near-term on account of temporary factors but added it should settle back to the 2.0% level in two years. BoE also reported the outlook for GDP growth “remains closed to trend over the next three years” but added risks are “on the downside.” BoE Governor King today said the impact of private consumption on the economy “is lower” and said consumption remains a key source of uncertainty in the domestic economy. King also dismissed speculation the U.K. economy is stagflating and said there have not been any second-round effects from oil price inflation. Cable bids are cited around the $1.8680 level and cable offers are seen around the $1.8780/ 1.8830 levels. The euro moved lower vis-à-vis the British pound as the single currency tested bids around the ₤0.6815 level and was capped around the ₤0.6845 level.


The Swiss franc weakened vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.2090 level and was supported around the CHF 1.1960 level. Today’s low was exactly the 38.2% retracement level of the move from CHF 1.1740 to CHF 1.2095. The Swiss SECO April consumer climate indicator is scheduled for release tomorrow. Dollar offers are cited around the CHF 1.2145 level. The euro came off marginally vis-à-vis the Swiss franc as the single currency tested bids around the CHF 1.5435 level and was capped around the CHF 1.5465 level.


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