Tuesday August 2, 2005 - 15:15:56 GMT
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Forex Market Commentary and Analysis (2 August 2005)
The euro appreciated vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.2250 level and was supported around the $1.2170 level. The common currency was briefly offered above the reported option barrier around the $1.2250 level but offers above this level pushed the pair lower. Technically, today’s high is right around the 23.6% retracement level of the move from $1.3480 to $1.1865. Data released in the U.S. today capped the single currency’s ascent in early North American dealing. It was reported that June personal income climbed +0.5% while June personal spending was up +0.8%, consistent with expectations. Notably, the personal savings rate printed at 0%, its lowest level since October 2001. Also, core headline and core personal consumption expenditures inflation were flat m/m and was up 1.9% y/y, the lightest gain since August 2004. These tame inflation data are the latest evidence that price pressures are not a significant problem in the U.S. economy. Dealers will closely watch next Tuesday’s Federal Open Market Committee meeting and the ensuing policy statement to see if Fed officials acknowledge the relatively benign inflation and if it impacts the recent “measured pace” that has described the removal of monetary policy accommodation. Other data released in the U.S. today saw June factory orders print at 1.0%, below May’s 2.9% pace. All eyes will be on this Friday’s U.S. July non-farm payrolls data with more forecasts predicting a gain of 180,000 additional jobs. June job creation printed at 146,000 and an upward revision could be a shot in the arm for the dollar. One factor that has lifted the euro over the past day is a report that Russia’s central bank has lowered the weighting of U.S. dollars in its currency reserve basket in favour of the euro. In eurozone news, EMU-12 June producer prices gained 0.5% m/m and 5.0% y/y while the EMU-12 unemployment rate was unchanged at 8.7% in June. French Prime Minister de Villepin today reported 2005 GDP growth is likely to be between 1.5% and 2.0%. Euro offers are cited around the $1.2345 level.
The yen extended yesterday’s gains vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥111.10 level after encountering offers around the ¥112.35 level. Stops were reached below the ¥111.45 level, the 23.6% retracement of the move from ¥104.15 to ¥113.70. One reason why the yen moved higher today was a comment from Bank of Japan Governor Fukui who said “As the impact of temporary factors wane, such as lower rice prices and cuts in electricity and telephone rates, there will be the possibility that the year-on-year change in the core CPI (consumer price index) rate will turn positive from around late this year or early next year.” This is the most hawkish comment Fukui has made in some time but most BoJ-watchers know the central bank is unlikely to remove policy accommodation until consumer price inflation remains above zero per cent, among other criteria. Japanese government officials were quick to counter Fukui’s comments with finance minister Tanigaki said an end to deflation “cannot be foreseen clearly.” Data released in Japan overnight saw July business sentiment for small and mid-sized Japanese companies rose 0.4% to 48.8 according to Shoko Chukin Bank. Other data released overnight saw the July monetary base climb 1.5% y/y, down from 1.7% in June. Nikkei today reported that Japan’s economy is likely to have expanded at a real 0.5% pace in the April – June quarter, equivalent to around a 1.9% annualized rate. Q2 GDP data are scheduled for release on 12 August. Traders will be closely watching the planned vote in the Upper House this Friday regarding privatization of Japan’s massive postal savings system. Prime Minister Koizumi may call a snap election if the vote does not pass and this could have a negative impact on the yen. The Nikkei 225 stock index lost 0.06% today to close at ¥11,940.20 after flirting with the psychologically-important ¥12,000 figure. Dollar bids are cited around the ¥110.70/ 05 levels. The euro moved lower vis-à-vis the yen as the single currency tested bids around the ¥135.90 level and was capped around the ¥136.80 level. The British pound, Swiss franc, and Australian dollar depreciated vis-à-vis the yen as these crosses tested bids around the ¥197.15, ¥87.20, and ¥84.95 levels, respectively. In Chinese news, Deputy Secretary of State Zoellick said it would not be “constructive” to punish China over its exchange rate policies. The yuan closed at 8.1032 to the U.S. dollar today. The State Administration of Foreign Exchange today said it is increasing the maximum limit on foreign exchange that domestic companies can hold from 50% to 80%, the latest change in China’s FX policy.
The British pound extended recent gains vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.7750 level and found bids around the $1.7665 level. This represented cable’s strongest showing since 13 July and sterling briefly traded above the $1.7725 level, the 23.6% retracement level of the move from $1.9215 to $1.7265. Data released in the U.K. today saw July construction activity fall to 54.7 from 55.8 in June. These data were tempered, however, by a distributive trades survey from CBI that reported U.K. retailers were “largely unaffected” by the recent terrorist attacks in the U.K. CBI’s sales balance improved to -18 from -19 in June and was better than the -25 reading that was expected. On the monetary policy front, most traders believe Bank of England’s Monetary Policy Committee will move interest rates lower by 25bps on Thursday in what would be the central bank’s first rate reduction in a couple of years. Cable offers are cited around the $1.7800/ 1.7920 levels. The euro was little-changed vis-à-vis the British pound as the single currency tested bids around the £0.6885 level and was capped around the £0.6900 figure.
The Swiss franc gained ground vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.2695 level and failed to trade through the CHF 1.2800 figure. Today’s low represented the pair’s weakest print since 28 June. Data released in Switzerland today saw July PMI improve to 52.4 from 51.8, the fifth consecutive month the manufacturing index was above the boom-or-bust 50.0 level. Dollar bids are cited around the CHF 1.2685 level. The euro and British pound depreciated vis-à-vis the Swiss franc as the crosses tested bids around the CHF 1.5555 and 2.2540 levels, respectively.
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