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Wednesday August 10, 2005 - 12:25:28 GMT
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Forex Market Commentary and Analysis (10 August 2005)

The euro appreciated vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.2425 level and was supported around the $1.2340 level. Today’s high represents the pair’s strongest print since 31 May and chartists report the common currency’s current challenge is to close above the technically-significant $1.2375/ 45 levels. As expected, the Federal Open Market Committee lifted the federal funds target rate to 3.50% yesterday, its tenth consecutive 25bps monetary tightening. The U.S. dollar was offered after the decision was announced because many traders construed the Fed’s policy statement to be less hawkish than expected. Policymakers reported “The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. Aggregate spending, despite high energy prices, appears to have strengthened since late winter, and labor market conditions continue to improve gradually. Core inflation has been relatively low in recent months and longer-term inflation expectations remain well contained, but pressures on inflation have stayed elevated.” They added “The Committee perceives that, with appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal. With underlying inflation expected to be contained, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.” In total, the Fed made it abundantly clear they will continue to raise rates gradually, perhaps through the end of the year. The Fed’s decision to raise rates yesterday would have benefited the U.S. dollar during the first half of the year as U.S. dollar yields widen above their corresponding eurozone counterparts. Currently, however, traders are not focused on yield differentials and traders found an excuse to sell the dollar on the news that has benefited the greenback for months. Fed funds futures are now discounting a federal funds target rate of 4.25% by the end of Q1 2006, or 75bps above current levels. The $1.2400 figure had been cited as an option barrier but this was absorbed and option triggers around the $1.2425 level are now being eyed. Data released in the eurozone today saw French June manufacturing output rise +0.3% m/m after a 0.1% decline in May. Also, Germany’s DIW Institute is predicting German GDP will expand 0.2% q/q in Q2 with an acceleration to 0.5% q/q in Q3. Euro offers are cited around the $1.2485 level.
¥/ RMB

The yen appreciated significantly vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥110.80 level. Stops were triggered below the ¥110.95 level and today’s low is just above a technical support level that represents a 23.6% retracement of the move from ¥113.70 to ¥109.85. Data released in Japan today saw the July wholesale goods price index rise 0.6% m/m in July, the first gain in three months, and was 1.5% higher y/y for the 17th consecutive monthly improvement. Recent inflation data in Japan have suggested that while consumer prices continue to be in a deflationary mode, they are likely to move back to zero per cent or even evidence some inflation perhaps as early as the end of this year. Traders closely watched a poll released in Japan overnight that reports a majority of Japanese voters want Prime Minister Koizumi’s initiative to privatize the post office to succeed. The yen was offered one and two weeks ago under the premise that the eventually-failed vote to privatize the postal savings system would spur political uncertainty. Now, an increasing number of dealers believe Koizumi’s parliamentary setback this week will strengthen his political hand and result in more economic and financial reforms – a net negative for the dollar. Traders cited anecdotal evidence overnight that Japanese investors are repatriating U.S. Treasury coupon payments back to Japan and this is thought to be giving the yen a lift also. The Nikkei 225 stock index climbed 1.66% to close at ¥12,098.08 while the TOPIX index tested a fresh four-year high. Dollar bids are cited around the ¥110.10 level. The euro moved sharply lower vis-à-vis the yen as the single currency tested bids around the ¥137.35 level. The British pound and Swiss franc tested bids around the ¥198.55 and ¥88.20 levels, respectively. In Chinese news, the yuan appreciated vis-à-vis the U.S. dollar as the greenback closed at 8.1062, down from 8.1070. Data released in China today saw July PPI up 5.2% y/y. People’s Bank of China Governor Zhou was quoted by the Financial Times as saying the U.S. dollar, yen, euro, and Korean won figure prominently in China’s new currency basket that the yuan is referenced to. The Malaysian ringgit, Russian ruble, Thai baht, Canadian dollar, and Australian dollar are also said to compose the basket.

The British pound rallied vis-à-vis the U.S. dollar today as the greenback tested offers around the US$ 1.7965 level and was supported around the $1.7860 level. Stops were triggered above the $1.7925 level, the 61.8% retracement of the move from $1.8330 to $1.7270. Bank of England released its Quarterly Inflation Report today and raised its inflation forecast, noting its forecast is above target in two years and escalating. BoE predicted inflation will be above the 2.0% target and said risks around this forecast are only “slightly to the downside.” The central bank cited sterling’s 3% trade-weighted index depreciation, stronger equity prices, and the decline in market interest rates since the May inflation report as upside risks. On the downside, policymakers acknowledged they underestimated the impact of the slowdown in the housing market on final private demand. Today’s report was so hawkish that is prompting doubts about whether the central bank’s monetary easing last week was a one-off event or the beginning of a shallow easing cycle with today’s report favouring the former. BoE Governor King today reported 2005 GDP growth will likely print around 2.0% and said oil is having a major impact on the U.K. economy. King also alluded to the “very mild” slowing of the U.K. labour market. Cable offers are cited around the $1.8010 level. The euro came off vis-à-vis the British pound as the single currency tested bids around the £0.6900 figure and was capped around the £0.6930 level.


The Swiss franc moved higher vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.2520 level and encountered offers around the CHF 1.2620 level. Stops were reached below the CHF 1.2565 level, representing the 38.2% retracement of the move from CHF 1.1740 to CHF 1.3080. Swiss June retail sales and the July SECO consumer climate index will be released tomorrow. Dollar bids are cited around the CHF 1.2465 level. The euro moved lower vis-à-vis the Swiss franc as the single currency tested bids around the CHF 1.5550 level and the British pound moved higher vis-à-vis the Swiss franc as sterling tested offers around the CHF 2.2555 level.


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