Monday August 1, 2005 - 14:45:44 GMT
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Forex Market Commentary and Analysis (1 August 2005)
The euro made sizable gains vis-à-vis the U.S. dollar today as the single currency tested offers around the $1.2240 level and was supported around the $1.2120 level. Stops were triggered above the $1.2215 level as this represents the 50% retracement level of the move from $1.0760 to $1.3665. Strong eurozone PMI data prompted the move higher as the number rose to 50.8 in July from 49.9 in June, the first pick-up in manufacturing activity since March. Another reason why the dollar is weaker today is a semi-annual report that was issued by the International Monetary Fund on Friday. The IMF reported the U.S. dollar may need to weaken “significantly” to slow the massive U.S. current account deficit. The major external imbalances in the U.S. economy including the budget deficit and current account deficit were both major themes that conspired against the dollar last year. Data released in the U.S. today saw the July ISM manufacturing number print at 56.6, up from June’s 53.8 level. This represented the 26th consecutive month of growth in the manufacturing sector and was above expectations. The new orders sub-index rose to 60.6, the highest level since December, while the employment sub-index climbed to 53.2 and the prices paid sub-index fell to 48.5. These data suggest manufacturing activity may continue to be a positive contributor to U.S. GDP activity in the absence of significant factory gate inflation. Other data released today saw June construction spending fall 0.3% to annual rate of US$ 1.1 trillion while the pending home sales index rose 0.6% in June to its third-highest level. If the dollar is unable to gain traction following decent data this week – last week’s solid GDP data and Chicago PMI data didn’t help its cause – traders will conclude this is a technical and asymmetric move whereby dollar longs are likely squaring some their positions. San Francisco Fed President Yellen hawkishly said on Friday that 3.5% represents the “absolute lower end” of the so-called neutral range for the U.S. federal funds rate. Yield plays continue to favour the U.S. dollar over the euro and the Federal Open Market Committee is expected raise short-term interest rates. Data scheduled for release in the U.S. this week include personal spending and income, factory orders, non-manufacturing ISM, and the all-important July non-farm payrolls data on Friday. In eurozone news, France and Italy both notched gains in their July manufacturing sectors while Germany’s PMI tally held stead at 49.9. Option traders report a double-no-touch option with an upper leg at $1.2250 and this may be capping the common currency’s upside until it reportedly expires on 10 August. Euro offers are cited around the $1.2345 level.
The yen gained ground vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥111.70 level after failing to get past the ¥112.75 level. Technically, today’s low is right around the 50% retracement level of the recent move from ¥113.70 to ¥109.90. The yen was offered on its crosses thus its gains vis-à-vis the U.S. dollar evidence the dollar’s difficulty today. Traders will closely watch this Friday’s postal system privatization vote in Tokyo amid speculation that Prime Minister Koizumi lacks the political support to push the measure through. Koizumi has threatened to dissolve the lower house of parliament should the vote fail and some traders believe this political uncertainty could keep the yen on the defensive this week. Data released in Japan today saw June average basic pay for Japanese workers climb 0.4% y/y, the third improvement in fourteen months. The primary reason why the yen is offered on its crosses is today’s death of Saudi Arabia’s King Fahd who was seen as a friendly oil-rich ally to the West and East. Crown Price Abdullah will assume the monarchy and has been the de facto ruler for years hence there is not likely to be any significant change in oil policy or foreign policy. Nevertheless, the price of NYMEX crude spiked to over $61.00 per barrel on the news. The Nikkei 225 stock index climbed 0.40% to close at ¥11,946.92. Dollar bids are cited around the ¥111.30/ 110.90 levels. The euro was bid higher vis-à-vis the yen as the single currency tested offers around the ¥136.85 level and was supported around the ¥136.35 level. The British pound, Swiss franc, and Australian dollar moved higher vis-à-vis the yen as the crosses tested offers around the ¥198.20, ¥87.80, and ¥85.35 levels, respectively. In Chinese news, the yuan closed today at 8.1046 to the dollar. Data released in China today saw the July PMI number print at 51.1, down from June’s 51.7 level. U.S. Treasury Secretary Snow spoke about China’s recent revaluation and said he thinks China make additional moves on the yuan.
The British pound made significant advances vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.7720 level and was supported around the $1.7540 level. Today’s price activity represents sterling’s strongest price since 13 July. Most traders believe Bank of England’s Monetary Policy Committee will lower interest rates by 25bps on Thursday in what would be the first monetary expansion in some two years in the U.K. Data released in the U.K. today saw July manufacturing PMI activity recede to 49.2 from 49.6 in June, the fourth consecutive worsening and a stark contrast to the eurozone’s PMI totals. Cable offers are seen around the $1.7745/ $1.7835 levels. The euro gained marginal ground vis-à-vis the British pound as the single currency tested offers around the £0.6920 level.
The Swiss franc appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.2725 level and was capped around the CHF 1.2895 level. Dealers cited significant buying of Swiss francs on account of the death of Saudi Arabia’s King Fahd and Iran’s confirmation that it would resume nuclear activities. The risk-aversion appeal of the Swiss franc periodically appeals to traders during geopolitical events of uncertainty. Swiss National Bank directorate member Hildebrand was quoted as saying Swiss price stability is “guaranteed for the long-term” and added he is looking forward to H2 2005 “with a certain optimism.” Dollar bids are cited around the CHF 1.2660 level. The euro and British pound depreciated vis-à-vis the Swiss franc as the crosses tested bids around the CHF 1.5575 and 2.2510 levels, respectively.
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