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Thursday May 26, 2005 - 14:05:15 GMT
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Forex Market Commentary and Analysis (26 May 2005)



The euro depreciated sharply vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.2510 level – a fresh seven-month low. Traders knocked the pair to intraday lows after the release of U.S. economic data that came in around expectations. Revised U.S. Q1 GDP data printed at 3.5%, around the lower end of most forecasts, while personal consumption ticked up to 3.6%. It was also reported that weekly initial jobless claims climbed 1,000 to 323,000. Albeit the GDP figure was a bit cooler than expected, it was stronger than last month’s preliminary 3.1% print and is further evidence of the glaring disparity between U.S. and eurozone growth rates. The core personal consumption expenditure price index climbed 2.2% while the March trade deficit of US$ 55 billion actually improved today’s revision from the initial report. It is also notable that there was a record 23.6% expansion in Q1 corporate profits to US$ 1.307 trillion. On an annualized basis, this was 35.9% stronger, the most impressive growth rate since Q3 1987. Consumer spending was upwardly revised to 3.6% from 3.5% but remains lower than Q4’s strong 4.2% pace. Later in the U.S. session, Treasury Secretary Snow will testify before the Senate Banking Committee and Fed officials Gramlich, Moskow, and Bies will speak. Atlanta Fed Governor Guynn spoke extensively about the U.S. economy last night and hawkishly said the U.S. economy has “ample strength” to weather additional removal of the current accommodative monetary policy. Guynn also added he foresees 2005 GDP growth of 3.5% to 4.0% and expressed concern with speculation in the residential U.S. housing market. Another factor that contributed to the dollar’s gains today was a Financial Times story in which former French finance minister Sarkozy is said to have private conceded that France will not vote in favour of the European Constitution in its Sunday referendum. A negative outcome in the vote has been discounted by traders for weeks so it remains to be seen what repercussions there will be for the common currency. Technically, the $1.2475/ 60 level represents an important downside target for the pair, the 23.6% retracement level of the move from US$ 0.8550 to $1.3665. Data released in German saw the May jobless total recede to 4.78 million from 4.97 million in April. Euro offers are cited around the $1.2605/ 65 levels.

¥

The yen moved lower vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥108.15 level and was supported around the ¥107.60 level. The pair only sold-off around ten pips during Australasian dealing before extending yesterday’s gains and accelerating through the ¥107.90 level. The pair was within ten pips of establishing a fresh multi-week high in early European dealing. Data released in Japan overnight saw the corporate services price index decline 0.2% m/m in April, the first decline in three months, while the year-on-year figure was 0.4% lower, the 58th consecutive month of annualized declines. These data are important because they confirm Japan has not defeated the clutches of deflation and reconfirm Bank of Japan is highly unlikely to end its long-standing quantitative easing policy, especially after the core CPI receded 0.3% in March. BoJ Policy Board member Nakahara spoke pessimistically about the Japanese economy today saying “worrying factors surrounding the Japanese economy seem to be increasing at the moment” but added the economy will “eventually move out of its current soft-patch and return to over 1% growth.” Nakahara alluded to escalating costs in raw materials and uncertainty regarding the U.S. and Chinese economies as areas of concern and said an improvement in Japan’s IT sector could be limited by “fierce price competition.” Furthermore, Nakahara reiterated the central bank’s need to keep an accommodative monetary policy to fend off deflationary pressures. The Japanese media today reported the International Monetary Fund is likely to raise its 2005 GDP forecast for Japan to more than 1.5%. The Nikkei 225 stock index gained 0.12% to close at ¥11,027.94. Dollar bids are cited around the ¥107.50 level and dollar offers are seen around the ¥108.30 level. The euro came off vis-à-vis the yen as the single currency tested bids around the ¥135.30 level and was capped just below the ¥136.00 figure. The cross remains hemmed in by offers around the ¥136.20 level and bids around the ¥134.95 level. In Chinese news, People’s Bank of China reported it will keep the yuan at a “reasonable and well-balanaced level.” Chinese trade official Yu today said “the time has not come” for China to revalue its currency and cautioned against “pushing China too hard.” Federal Reserve Governor Bernanke yesterday called on China to “quickly adopt” a more flexible exchange rate policy. PBOC also reported a large increase in its Q1 trade surplus and foreign exchange reserves will impose “serious challenges on its monetary policy.” The U.S. Commerce Secretary will visit China next week to discuss the budding disagreement about protectionist textile measures. Data released in China today saw investment in fixed assets decelerate and private consumption accelerate in Q1.



The British pound moved sharply lower vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.8210 level and was capped around the $1.8325 level. This represents the pair’s lowest print since 28 November 2004. Sterling’s slide accelerated through the 1.8270 level. European dealers lifted the pair back to the $1.8280 level from the $1.8220 level but early North American selling pressure saw the rate move to intraday lows. CBI reported that manufacturing order books have weakened and are now at levels that have not been regularly seen since the end of 2004 with 41% of survey respondents reporting order books are below normal. CBI also lowered its U.K. growth forecast for 2005 to 2.5% from 2.7% and to 2.3% from 2.6% for 2006. Notably, these estimates are below the 3.0% to 3.5% forecasts that Chancellor of the Exchequer Brown promoted during his Budget speech. CBI also predicted CPI will reach 2.2% in Q4 2005. Cable offers are cited around the $1.8270/ 1.8320 levels while cable bids are seen around the $1.8140 level. The euro moved lower vis-à-vis the British pound as the single currency tested bids around the ₤0.6885 level and was supported around the ₤0.6860 level.

CHF

The Swiss franc moved lower vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.2370 level and was supported around the CHF 1.2260 level. Today’s high represents the strongest print for the pair since 15 October 2004. The move above the CHF 1.2300 figure was swift and a round of buying in early European dealing pushed the pair through the CHF 1.2325 level. Traders await the May KOF leading indicator and comments from Swiss National Bank President Roth tomorrow. Dollar bids are cited around the CHF 1.2325/ 1.2295 levels. The euro moved marginally higher vis-à-vis the Swiss franc today as the single currency tested offers around the CHF 1.5485 level and was supported around the CHF 1.5440 level.

 

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