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Thursday July 21, 2005 - 14:44:43 GMT
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Forex Market Commentary and Analysis (21 July 2005)

The euro retraced its intraday gains vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.2255 level after news of a revaluation in China’s yuan currency but later moved back to the $1.2135 level. Traders readied themselves for the second and final day of Fed Chairman Greenspan’s semi-annual economic testimony to Congress. Greenspan will be testifying before the Senate Banking Committee today and is likely to repeat his fairly hawkish prognosis for the U.S. economy, the U.S. dollar, and inflation. Yesterday, the Fed chief pointed to rising unit labour costs as being a potential catalyst for inflation that warrants close scrutiny. Greenspan is likely to be asked to comment on China’s revaluation today and will likely offer an endorsement to counter the protectionist, anti-China legislation that is being sponsored by some U.S. legislators. The biggest message that traders took away from Greenspan’s testimony was that the Federal Reserve is likely to continue removing monetary policy accommodation at a “measured pace.” Data released in the U.S. today saw weekly initial jobless claims fall 34,000 to 303,000 last week – the lowest level in three months and the largest decline since December 2002. Continuing jobless claims also fell and remain below 2.6 million persons at present. In eurozone news, Germany’s finance ministry said recent indicators are pointing to an “ongoing moderate recovery” while European Central Bank’s Liebscher reported there has been no change in the EMU-12 inflation outlook. Data released in the eurozone today saw EMU-12 combined direct/ portfolio investment register a net inflow of €27.9 billion in May after April’s net outflow of €15.8 billion. Also, the May EMU-12 current account surplus came in at €900 million, up from April’s €800 million surplus. Additionally, French June consumer spending on manufactured goods was up +0.5% m/m and +0.5% y/y and Italian May retail sales gained +0.7% m/m and +0.9% y/y. Euro offers are cited around the $1.2245/ $1.2340 levels.


The yen appreciated sharply vis-à-vis the U.S. dollar today as tested bids around the ¥110.20 level and was capped around the ¥112.85 level. News that China has finally revalued its yuan currency after months and years of speculation precipitated an immediate appreciation in the yen as traders view it as a close proxy to China’s yuan currency. MoF’s Hosokawa verbally intervened in the FX markets today saying the government is “watching (FX) moves with interest” and added exchange rates should reflect fundamentals. MoF’s Watanabe repeated recent comments regarding China’s need to revalue the yuan but they were probably made before the official revaluation announcement was made. Data released in Japan today saw the June trade surplus fall 0.5% m/m and 23.5% y/y to ¥873.1 billion. Notably, exports increase 2.4% to ¥5.37 trillion and imports rose 2.9% to ¥4.67 trillion. The Nikkei 225 stock index shed 0.02% to close at ¥11,786.73. Dollar bids are cited around the ¥109.55 level. The euro posted major losses vis-à-vis the yen as the single currency tested bids around the ¥134.45 level after testing offers around the ¥137.20 level. The British pound notched significant losses vis-à-vis the yen as sterling tested bids around the ¥192.85 level after being capped around the ¥196.80 level. The Swiss franc tested bids around the ¥86.10 level after failing to get through the ¥87.85 level. The Australian dollar tested bids around the ¥84.30 level after failing to move above the ¥85.65 level. In Chinese news, People’s Bank of China announced an immediate 2.01% revaluation in the Chinese yuan currency to RMB 8.11 per U.S. dollar from 8.2765 where it has traded for some eleven years. PBOC announced the trading band that permits the currency to move 0.3% either side of the mid-point. There is also a new currency basket that permits non-U.S. dollar currencies to trade vis-à-vis the yuan with certain trading bands. Those currencies and those bands have not been disclosed. Conspiracy theorists suggest China chose today to revalue its yuan currency because Greenspan will be testifying before the Senate Banking Committee and there was anti-China legislation being sponsored by Senators Schumer and Graham that would have punished Chinese trade if China did not revalue its yuan. Fed Chairman Greenspan is likely to confirm today’s move is an important one and potentially defuse criticism from Senators that China has not revalued the yuan currency sufficiently. Today’s move is likely the first in a series of yuan revaluations over the course of years and many believe the ultimate goal will be to get the yuan currency close to the USD/ HKD exchange rate. Data released in China today saw June urban CPI up 1.3% y/y while June wholesale prices were up 3.0% y/y.

The British pound appreciated vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.7620 level and was earlier supported around the $1.7390 level. There were three dominant themes involving the pound today. First, China revalued its yuan currency and the U.S. dollar sold-off across the board as a result. Second, U.K. retail sales climbed +1.3% m/m and +0.8% y/y in June, the largest monthly gain since December 2004. Despite these data, it is too early to predict how this may impact the increasing likelihood of a move down in U.K. interest rates by Bank of England’s Monetary Policy Committee next month following the close 5-4 vote this month to keep rates unchanged. Tomorrow’s Q2 GDP data in the U.K. will yield more clues regarding the probability of additional monetary expansion next month. Third, there were more incidents reported on the U.K. Underground system today with the implication that they were related to terrorism. Several Tube stops were closed and reports of armed officers entering a London hospital have traders nervous. Cable offers are cited around the $1.7590 level. The euro depreciated vis-à-vis the British pound as the single currency tested bids around the ₤0.6940 level and remained capped around the ₤0.6985 level.


The Swiss franc realized modest gains vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.2750 level after testing offers around the CHF 1.2880 level. Today’s price activity represents the pair’s lowest level since 13 July. In Swiss news, Swiss exports gained 4.9% y/y last month while imports were off 0.6% and the June trade surplus printed at CHF 1.714 billion. Dollar bids are cited around the CHF 1.2685 level. The euro lost marginal ground vis-à-vis the Swiss franc as the single currency tested bids around the CHF 1.5595 level while the British pound moved sharply higher vis-à-vis the Swiss franc, testing offers around the CHF 2.2515 level.


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