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Thursday June 30, 2005 - 13:57:50 GMT
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Forex Market Commentary and Analysis (30 June 2005)

The euro recovered its losses vis-à-vis the U.S. dollar today and traded as high as the US$ 1.2110 level before settling back around the $1.2080 level. Earlier, bids had supported the common currency about the $1.2040 level. Today is the last trading day of the month, quarter, and first half of 2005 and many dealers expect volatile price activity, especially with the Federal Open Market Committee’s interest rate decision at 1815 GMT. Most dealers expect the Fed will tighten monetary policy by +25bps, lifting the federal funds target rate to 3.25%. This would make U.S. dollar assets more attractive to investors, increase the U.S.’s positive interest rate differential against lower-yielding currencies, and reduce the U.S.’s negative interest rate differential against higher-yielding currencies. Fed funds futures continue to price in another +50bps of additional monetary tightening by the end of the year following today’s likely +25bps move higher. Data released in the U.S. today saw May personal income print at +0.2% while May personal spending remained unchanged. Weekly initial jobless claims fell 6,000 to 310,000 and May core personal consumption expenditures – a favourite inflation measure of the Fed – printed at +1.6% y/y, a relatively tame number. These data follow yesterday’s relatively tame GDP price deflator and strong +3.8% Q1 GDP print. An assessment of H1 2005 easily reveals contained price pressures and above-trend economic growth in the United States, a stark contrast to the state of affairs in the eurozone. Many data were released in the eurozone today including the June flash HICP inflation measure and it was up 2.1% y/y from May’s +1.9% y/y tally. This number supported the common currency today because it provides an argument for the European Central Bank to rebuff calls from many quarters for lower interest rates. Strong M3 money supply growth of 7.3% in May from 6.8% in April are also playing to the ECB’s favour. Nonetheless, however, the markets clearly believe the ECB’s next interest rate move will be lower, probably by the end of the year. Other data released today saw the European Commission’s economic sentiment index rally to 96.3 in June from 96.1 in May while the business climate indicator improved to -0.29 from -0.37 in May. Also, German June unemployment fell to 11.7% from May’s 11.8% level. French final Q1 GDP came it at +0.3% q/q and +1.8% y/y and Italian producer price inflation fell to its lowest monthly level since April 2003. U.S. President Bush is scheduled to speak about the upcoming G8 summit later this morning. Euro offers are cited around the $1.2130/ 65 levels.


The yen moved lower vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥110.80 level and was supported just below the psychologically-important ¥110.00 figure. The pair has not traded at these levels since early October 2004 and options dealers report offers ahead of an ¥111.00 option barrier that is said to expire in mid-July, hence the pair’s further gains may be capped for now. Data released in Japan overnight saw May housing starts rise 3.0% y/y, the fourth increase in five months. Also, June manufacturing PMI printed at 54.0 compared with 53.5 in May and new orders and output were both comfortably above the “boom-or-bust” 50.0 level. Additionally, construction orders were up +0.5% y/y. Bank of Japan Policy Board member Mizuno today said the central bank’s current account target should be reduced and added monetary policy should be “normalized” once a sustainable economic recovery is in process. MoF’s Watanabe spoke about China’s need to reform its yuan exchange rate policy saying a move should be “quick and decisive.” He also added the yen does not need to appreciate when the yuan is reformed and reiterated Japan has no plans to sell dollars for euros at this time. The Nikkei 225 stock index gained a mere 0.06% to close at ¥11,584.01. Dollar bids are cited around the ¥110.20 level and dollar offers are seen around the ¥111.75 level. The euro gained ground vis-à-vis the yen as the single currency tested offers around the ¥134.05 level and was supported around the ¥133.05 level. Today’s high is the 61.8% retracement of the move from ¥136.15 to ¥130.65. In Chinese news, Federal Reserve Chairman Greenspan and U.S. Treasury Secretary Snow will participate in a meeting regarding China’s trade policy at 1900 GMT today. Also, Reserve Bank of Australia Governor Macfarlane today called on China to “adjust its exchange rate.”

The British pound extended recent sharp losses vis-à-vis the U.S. dollar today as cable plummeted to just above the $1.7900 figure, its lowest level since mid-October 2004. Economic data releases conspired to push sterling lower. First, it was reported that U.K. Q1 GDP was sharply revised downward to +0.4% q/q and +2.1% y/y, below expectations. Household spending was revised downward to +0.1% q/q and +2.6% y/y and service output lessened to +0.7% q/q from +0.8%. Unless Q2 economic growth registers a strong improvement, the U.K. economy is likely to expand at a pace below the Bank of England’s latest quarterly growth forecast released in May. Second, the U.K. current account deficit worsened substantially to -₤5.824 billion in Q1 from -₤4.103 billion in Q4 2004. Third, Nationwide reported house prices fell 0.2% in June and notched their lowest year-on-year rise since 1996, up only 4.1%. Fourth, the GfK June consumer confidence barometer worsened to -3 from -1. Collectively, these data increase the likelihood that Bank of England’s Monetary Policy Committee will ease monetary policy in H2 2005. Furthermore, it is likely that more than two committee members will vote for lower rates at the July MPC meeting. Cable offers are cited around the $1.8095/ 50/ $1.7995 levels. The euro rocketed vis-à-vis the British pound as the single currency tested offers around the ₤0.6755 level and was supported around the ₤0.6680 level. Today’s high is this cross’s strongest print since 3 June and is around the 50% retracement level of the move from $0.6805 to $0.6610.


The Swiss franc came off marginally vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.2860 level and was supported around the CHF 1.2780 level. Data released in Switzerland today saw June CPI fall 0.2% m/m but climb 0.7% y/y, the latest evidence that price pressures are contained in the eurozone. These data were also below expectations. Swiss National Bank is not expected to tighten monetary policy anytime soon and this is the primary reason why the pair has gained more than 12.7% in H1 2005. Also, the Swiss franc is being utilized more and more as a funding currency for carry trades. Dollar bids are cited around the CHF 1.2760 level. The euro moved higher vis-à-vis the Swiss franc as the single currency tested offers around the CHF 1.5505 level and was supported around the CHF 1.5470 level.


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