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Thursday May 12, 2005 - 13:53:44 GMT
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Forex Market Commentary and Analysis (12 May 2005)

The euro extended recent losses vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.2700 figure and was capped around the $1.2815 level. The move lower accelerated sharply after the released of stronger-than-expected U.S. April retail sales data that saw a headline increase of +1.4% and +1.1%, ex-autos. March’s headline number was upwardly revised to +0.4% from +0.3% and its ex-autos component was also upwardly revised. Also, weekly initial jobless claims climbed +4,000 to 340,000. These data are important because they suggest that final private demand may be stronger than originally contemplated and that the so-called “soft patch” in the U.S. during Q1 may have been more moderate than originally believed. Coupled with yesterday’s narrower-than-expected March trade deficit, these data could lead to an upward revision in preliminary U.S. Q1 GDP data. There was a brief potential terrorist scare over the skies of Washington, D.C. yesterday when an errant plane had to be diverted away from secure airspace and this temporarily jilted confidence in the U.S. dollar. Import and export numbers and the mid-May University of Michigan consumer sentiment number will round out this week’s data releases in the U.S. In the eurozone, provisional Q1 GDP printed +0.5% q/q and was up +1.4% y/y but economists have reduced their forecast for Q2 economic growth according to the European Central Bank’s May monthly bulletin. The ECB also reported it is “closely monitoring” rises in the EMU-12 house prices to see if they impact growth and inflation and added oil prices are “crucial” for the eurozone’s inflation outlook. Moreover, the ECB continues to predict 2005 EMU-12 HICP growth of +1.9% and +1.8% in 2006, unchanged from its Q1 survey. The ECB, however, downwardly revised its 2005 EMU-12 growth forecast from 1.8% to 1.6%. Other data released today saw German GDP up 1.0% q/q in Q1 and flat y/y. The German Economy minister also called on the ECB to continue its “wait-and-see” approach regarding monetary policy. Options traders had cited option barriers around the $1.2740/ 30 levels but these were easily absorbed. Euro bids are cited around the $1.2695 level and euro offers are seen around the $1.2765 level.


The yen moved lower vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥106.30 level after hitting stops above the ¥105.98/ ¥106.00 level – the 38.2% retracement level of the recent ¥108.90 - ¥104.65 range. Dollar bulls next look to the ¥106.50/55 level as an upside target and the ¥107.10 level above there. Traders reacted to news that North Korea may have moved closed to testing a nuclear device in Japan’s backyard with talk focusing on the removal of nuclear fuel rods from a purported nuclear site. North Korea is said to have possibly tested a short-range missile last week and flew a missile over Japan in 1998. Recent comments from a United National official suggest North Korea may possess enough enriched uranium for six nuclear weapons. Data released in Japan today also added to the pair’s gains as April machine tool orders were off 2.2% m/m and April bank lending was off 2.6% y/y, the 88th consecutive monthly decline. Additionally, M2+CD money supply growth was up 1.9% y/y in April, a deceleration from March’s 2.1% expansion. Japanese officials spoke extensively about the Chinese yuan reform issue overnight. Finance minister Tanigaki said China would benefit from a more flexible yuan policy and said it is “simplistic” to think a change in the yuan will lead to a higher yen. He also added Japan has no plans to change the allocation of its foreign exchange reserves. MoF’s Hosokawa also called on China to revalue the yuan and said stable economic growth in China is “crucial” for the global economy. MoF’s Watanabe said a flexible yuan policy would allow Japan to achieve “long-term economic growth.” The Nikkei 225 stock index came off 0.38% to close at ¥11,077.94. Dollar bids are cited around the ¥106.00 figure and offers are seen around the ¥107.00/ 10 level. The euro gained marginal ground vis-à-vis the yen as the single currency tested offers around the ¥135.80 level and was supported around the ¥135.20 level. Technically, today’s daily price activity is an inside bar next to yesterday’s daily bar that perfectly tested technical resistance around the ¥136.20 level and technical support around the ¥134.95 level. In Chinese news, it was reported that January – April actual foreign direct investment increased 2.24% y/y to US$ 17.47 billion. In a sign that China may play hardball with countries that impose protectionist measures against it for not revaluing its yuan now, it was announced that China may set duties of up to 40% on cotton imports. In comments posted on the People’s Bank of China’s website today, the central bank omitted a reference that was widely quoted yesterday in which it was suggested PBOC is “technically” ready to effect currency reform. Sources said to be close to PBOC today told a media newswire that a revaluation is unlikely in the coming weeks.

The British continued its move lower vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.8600 figure, its lowest level since 28 March. Beyond that day, sterling has not been this week since 10 February. Technically, the move in cable accelerated through the $1.8625 level – the 50% retracement of the September 2004 – December 2004 move higher – after the release of stronger-than-expected U.S. April retail sales. Sterling continues to be dented by narrowing positive interest rate differentials with the U.S., a more dovish tone in yesterday’s Bank of England quarterly inflation report, and waning support for recently re-elected Prime Minister Blair from within his Labour party. Weakness in manufacturing and industrial output and shaky consumption are also contributing to sterling’s weakness. Cable bids are cited around the $1.8510 level and cable offers are seen around the $1.8720 level. 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 ₤0.6850 level.


The Swiss franc continues its pullback vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.2170 level and was supported at the CHF 1.2050 level. Today’s prints represented the pair’s strongest levels since 14 April and dollar bulls are eyeing the CHF 1.2195/ CHF 1.2240 levels as the next upside targets. Technically, the CHF 1.2145/ 50 level represents a critical pivot point related to the October – December 2004 range. Dollar bids are cited around the CHF 1.2005/ 1.1955 levels. The euro moved marginally higher vis-à-vis the Swiss franc as the single currency tested offers around the CHF 1.5465 level and was supported around the CHF 1.5440 level.


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