Wednesday August 3, 2005 - 15:15:31 GMT
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Forex Market Commentary and Analysis (3 August 2005)
The euro made significant gains vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.2325 level, its highest print since 8 June. Stops were reached above key technical levels around the $1.2245/75 levels and the common currency was supported around the $1.2150 level. Recent U.S. economic data have been good and the dollar has instead reversed course and depreciated, leading many to wonder if the greenback’s cyclical gains are ending and whether traders are starting to refocus on structural issues like the sizable U.S. current account and budget deficits. Data released in the U.S. today saw the July ISM non-manufacturing index print at 60.5%, down from June’s 62.2% pace, more-than-expected but still above the “boom-or-bust” 50.0 levels. The new orders sub-index improved to 61.9% while the employment sub-index receded to 56.2% and the prices paid sub-index climbed to 70.3%, the highest level since December. Other data released today saw Challenger layoffs around 102,971, down 7% m/m. Economists, however, caution that this is not necessarily a reliable proxy for non-farm payrolls data. The July non-farm payrolls tally will be released on Friday and is expected to be around 180,000. On Tuesday, the Federal Open Market Committee will deliberate monetary policy and is expected to raise the federal funds target rate from 3.25% to 3.50%. Many Fed watchers believe the target rate could be at 4.00% by the end of 2005 and all market participants will be curious to learn whether or not the Fed retains its “measured pace” mantra to describe its planned removal of policy accommodation. In eurozone, news, EMU-12 retail sales climbed 0.4% m/m and 0.9% y/y in June, exceeding expectations. Also, the EMU-12 July services business activity index came in around 53.5, up from June’s 53.1 level. Germany and Italy notches gains in their respective services business indices while France’s fell. Dealers continue to cite euro buying from sovereign and quasi-sovereign Middle East names that are thought to be rejigging their reserves portfolios from U.S. dollars to euros now that NYMEX crude futures have spiked to over US$ 63.00. Euro offers are cited around the $1.2345/ 75 levels.
The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥111.05 level and was capped around the ¥111.90 level. Today’s low represents the pair’s lowest level since 22 July and stops were triggered below the ¥111.30 level. Technically, the next round of demand is expected ahead of technical support seen around the ¥110.95 level. In Japanese news, it was reported the government is seeking to extend around ¥1 trillion in corporate tax breaks that currently expire around 31 March. Politically, there may be some horse-trading like this ahead of this Friday’s planned vote in the upper house on privatization of the massive postal savings system. The vote is currently too close to call and Prime Minister Koizumi has warned he may call a snap election if the measured does not pass. A failure to pass the vote could dent confidence in the yen. Nikkei reports that the current account surplus at Bank of Japan is likely to fall below the ¥30-35 trillion range today or tomorrow but this will not impact monetary policy and is actually an indication that the Japanese banking system is strengthening. Dealers cite stronger buying activity from oil companies given the current spike in crude futures. The Nikkei 225 stock index climbed 0.35% to close at ¥11,981.80 and again flirted with the psychologically-important ¥12,000 figure. Dollar bids are cited around the ¥110.95/ 70 levels. The euro appreciated sharply vis-à-vis the yen as the single currency tested offers around the ¥137.15 level. The British pound, Swiss franc, and Australian dollar appreciated vis-à-vis the yen as these crosses tested offers around the ¥198.50, ¥88.05, and ¥85.75 levels, respectively. In Chinese news, the government reported it expects 2005 CPI growth to be less than 2.5% and this is likely to provoke calls from some who believe China may be on the edge of encountering some deflationary pressures in some segments of its economy. The yuan closed at 8.1051 to the dollar today compared with 8.1032 yesterday.
The British pound gained strong ground vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.7830 level and was supported around the $1.7650 level. Today’s high represented sterling’s best showing since 1 July. Data released in the U.K. today saw July consumer confidence improve last month according to Nationwide, signifying the recent terrorist attacks in the U.K. have thus far had relatively little impact on the U.K. economy. The CIPS service sector activity index improved to 56.3 in July from 55.8 in June. All eyes will be focused on Bank of England’s Monetary Policy Committee meeting tomorrow as policymakers are expected to reduce the headline repo rate target by 25bps to 4.50% in what would be the first monetary easing in two years. Other data released today saw BRC shop price inflation lower by 0.60% y/y last month. Cable offers are cited around the $1.7930 level. The euro moved higher to the £0.6920 level and was supported around the £0.6875 level.
The Swiss franc extended recent gains vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.2630 level and failed to get through the CHF 1.2815 level overnight. Today’s low represents the weakest level for the pair since 22 June. Data released in Switzerland today saw July CPI off 0.5% m/m and up 1.2% y/y, consistent with expectations. Some dealers believe the Swiss franc may continue to benefit given its safe-haven status following Iran’s resumption of nuclear activities, shaky U.S. – North Korean talks, escalating oil prices, and some uncertainty regarding the chain of command in Saudi Arabia. Dollar bids are cited around the CHF 1.2565 level. The euro and British pound lost ground vis-à-vis the Swiss franc as the crosses tested bids around the CHF 1.5555 and 2.2475 levels, respectively.
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