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Thursday June 2, 2005 - 14:15:43 GMT
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Forex Market Commentary and Analysis (2 June 2005)

The euro regained some recent lost ground vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.2295 level and was supported around the $1.2175 level. The pair rocketed through the $1.2250 level during early European dealing and nearly reclaimed some 76.4% of yesterday’s losses. The common currency lost some ground after the release of U.S. economic data today that saw Q1 productivity print at a revised 2.9%, consistent with expectations, while unit labour costs gained +3.3%, hotter-than-expected. These data suggest inflationary pressures are having second-round effects via consumer prices and wages and could have a hawkish impact on the Fed’s monetary policy. Other U.S. data released today saw weekly initial jobless claims climb +25,000 to 350,000 while continuing claims came in around 2.6 million. Also, April factory orders came in at +0.9%, just below expectations while May Challenger layoffs worsened. The big number of the week remains tomorrow’s May non-farm payrolls data with most forecasts looking at gains of +175,000, around 100,000 than April’s strong print. Some of the euro buybacks today could be attributable to comments made by Dallas Fed President Fisher yesterday wherein he intimated the Fed is nearing the end of its tightening cycle. Fisher later enacted damage control, adding he is more concerned about inflation that economic growth. His comments were unusual for a Fed official and could evidence some divisiveness among Fed officials about the continuity of the current contractionary policy objectives. The euro was driven to new multi-month lows late in the session yesterday after it was reported that the Netherlands had rejected the EU Constitution – like France – in a referendum yesterday. This seriously calls into question the future of the EU’s expansion plans and will likely change the dynamic of European politics. Traders wonder whether or not it will undermine credibility in the euro even further. European Central Bank policymaker Mersch said the French and Dutch decisions do not imply a breakup of Economic and Monetary Union while ECB’s Wellink said such talk is “utter nonsense.” Germany’s Koch-Weser also downplayed the decisions and said the markets should instead focus on economic imbalances. Data released in the eurozone today saw EMU-12 industrial producer prices rise 0.4% m/m and +4.2% y/y in April. Euro offers are cited around the $1.2360 level.


The yen moved higher vis-à-vis the U.S. dollar today as the greenback slipped back and tested bids around the ¥108.10 level after failing to get through offers ahead of the ¥108.80 level. Bank of Japan did not inject new liquidity via money market operations today and this caused the current account surplus to fall below the ¥30-35 trillion range for the first time since March 2001. BoJ recently announced it would permit the level to fall below the target range and explained it would purely be a technical move and not a beginning of the end of its long-standing quantitative easing policy. BoJ Policy Board member Mizuno today said the liquidity target “can be lowered already” and speculate core CPI could turn positive from next January. Some traders bought yen on this event as they perceive it to be the first step of returning to monetary normalcy despite the central bank’s insistence that it represents no change in policy. Naturally, this elicited a response from the government with finance minister Tanigaki saying he expects the BoJ to take “appropriate action” if the current account target falls below the range. This represents a turf war between the central bank and MoF. The former wants to restore some semblance of monetary orthodoxy while the latter wants to keep borrowing costs as low as possible for as long as possible. Data released in Japan today saw the May monetary base climb 2.2% y/y, down from April’s 3.0% y/y expansion. Also, capital flows data indicated Japanese investors were net buyers of foreign bonds for the eighth week in the last nine weeks while foreigners were net sellers of Japanese equities last week for the seventh week in the last nine weeks. Collectively, there was a net inflow of ¥206.5 billion last week. BoJ Governor Fukui reiterate the easy monetary policy will remain until CPI is above zero per cent, less hawkish than Mizuno’s comments. MoF’s Watanabe also talked down the BoJ’s money market operation today and said it will be “better” for China to adopt a more flexible yuan policy. The Nikkei 225 stock index shed 0.44% to close at ¥11,280.05. Dollar bids are seen around the ¥107.85 level. The euro reclaimed some recent lost ground as the single currency briefly tested offers just above the ¥133.00 figure and was supported around the ¥132.15 level. Option traders cite a ¥133.00 expiry at 1400 GMT today. Euro offers are seen around the ¥133.10 above which stops are cited. In Chinese news, a Development and Research Center official said People’s Bank of China will “face even greater challenges…if the foreign exchange policy remains rigid.” Along the same lines, the Chinese media quoted the State Administration of Foreign Exchange as saying it is a “great challenge” to manage China’s foreign reserves, most of which are in U.S. dollars.

The British pound appreciated vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.8205 after trading around the $1.8080 level. Sterling was helped higher during the European session by a report that showed Nationwide May house prices were up 0.3% m/m and +5.5% y/y, above expectations. Nationwide also reported that the annualized house price inflation is at its lowest level since August 1996. Other data released today saw May construction sector CIPS fall to its lowest level in 3 ½ years, further evidence of weakness in the construction sector. Cable offers are seen around the $1.8210 level. The euro moved higher vis-à-vis the British pound as the single currency tested offers around the ₤0.6760 level and was supported around the ₤0.6730 level. Euro offers are seen around the ₤0.6775 level.


The Swiss franc moved higher vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.2470 level after being capped around the CHF 1.2575 level. Data released in Switzerland today saw Q1 GDP stagnate following a decline of 0.1% in Q4 2004. Most economists expected the economy to gain ground in Q1. Exports receded 1.0% in Q1 and they could remain weak as Germany, France, and Italy continue to experience their own economic problems. It is probable Swiss National Bank will keep interest rates unchanged when it convenes on 16 June as inflationary pressures remain moderate. Dollar bids are cited around the CHF 1.2460 level. The euro moved higher vis-à-vis the Swiss franc as the single currency tested offers around the CHF 1.5350 level and was supported around the CHF 1.5310 level.


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