Thursday August 25, 2005 - 15:59:14 GMT
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Forex Market Commentary and Analysis (25 August 2005)
The euro was flat vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.2320 level and was supported around the $1.2255 level. The pair briefly tested offers above the 50% retracement level of the move from $1.2485 to $1.2125 but soon came off below the figure. The common currency came off after the release of the August German Ifo business climate index that fell to 94.6 from 95.0 in July, below expectations. Similarly, the August business assessment index receded to 93.8 from 94.9 in July, below forecasts, while the business expectations index rallied to 95.4 from 95.1. Many traders anticipated an improvement in the Ifo index given the improvement in this week’s German ZEW index. Other data released in Germany today saw preliminary August consumer prices climb 0.1% m/m and 1.9% y/y, consistent with expectations. On a harmonized basis, HICP was up 0.1% m/m and 1.8% y/y. Final August inflation data are scheduled for release in mid-September. In other eurozone news, Bank of Italy Governor Fazio is embroiled in a telephone wiretap scandal involving the sale of Banca Antonveneta SpA. Bank of Italy employees are said to be ready to strike if Fazio does not step down as Governor. There are unlikely to be any implications for European Central Bank other than the taint of a scandal. In U.S. news, weekly initial jobless claims were released today and they fell 4,000 to 315,000 while continuing jobless claims printed at 2.57 million. Chicago Fed President Moskow was hawkish in his remarks yesterday saying the threat of rising energy prices on core inflation is now higher than it was one year ago. Fed funds futures are currently pricing in around a 50% chance the Federal Open Market Committee will tighten policy by 50bps to 4.00% by the end of the year, and a 50% chance the target rate will be +75bps higher to 4.25%. Moskow reported “Because the economy is running nearer to potential, unfavorable cost developments are more likely to pass through to core inflation. And core inflation is now at the upper end of the range that I feel is consistent with price stability. If we indeed start to see a string of higher inflation numbers, people may begin to expect permanently higher inflation. Such expectations could become self-fulfilling if they become built into the behavior of households and businesses. And this would have adverse effects on longer term economic performance. If this occurred, the Fed would need to respond accordingly in order to restore price stability. Financial market data and surveys suggest that the private sector's long-run inflation expectations remain stable.” Fed Chairman Greenspan will speak at Friday’s annual Fed conference in Jackson Hole, Wyoming and could very likely talk about the sizable current account deficit, low national savings rate, etc. Dealers are also monitoring the impact of yesterday’s downgrade of Ford’s and General Motors’s debt to junk states. Together, they are among the largest issuers of U.S. corporate debt with an aggregate total of more than US$ 400 billion outstanding. Foreign investors purchased a record net US$ 52 billion of U.S. corporate bonds in June, an appreciable percentage of the US$ 71.2 billion of net capital inflows into the U.S. Without these inflows, the U.S. trade deficit could not be financed and the U.S. dollar would likely depreciate. Euro offers are cited around the $1.2345/ 95 levels.
The yen moved higher vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥109.75 level after testing offers around the ¥110.40/ 45 level. Stops were reached below the ¥110.10 level, representing the 50% retracement of the move from ¥106.50 to ¥113.70 level. Data released in Japan today saw the July trade surplus decline 22.6% y/y in July to ¥873.57 billion, primarily on account of inflated oil prices. Exports and imports jumped 4.3% and 11.6%, respectively. Notably, Japan’s trade surplus with the rest of Asia lessened 9.8% to ¥676.2 billion and this may represent the impact of exported relatively cheap Chinese goods in the region. Crude oil imports escalated 48.5% y/y and drove up overall imports by 5.9%. Other data released overnight saw domestic shipments of consumer electronic products recede 1.8% y/y in July to ¥213.4 billion, down from June’s 1.7% climb and the first fall in twenty months. Traders continue to monitor developments in the oil market as NYMEX futures have surged to a record US$ 68, the highest level since crude futures started trading in 1983. MoF vice finance minister Hosokawa today indicated he is “concerned (about the impact of oil) on consumer spending, corporate earnings, (and) its impact on the global economy.” Japan, like most Asian countries, is a net importer of oil and the yen has a tendency to depreciate when energy prices appreciate. The Nikkei 225 stock index lost 0.78% to close at ¥12,405.16. Dollar bids are cited around the ¥109.25/ ¥108.90 levels. The euro depreciated vis-à-vis the yen as the single currency tested bids around the ¥134.80 level and was capped around the ¥135.55 level. The British pound depreciated vis-à-vis the yen as sterling tested bids around the ¥197.75 level while the Swiss franc was little-changed vis-à-vis the yen and was capped around the ¥87.45 level. The Chinese yuan appreciated marginally vis-à-vis the U.S. dollar today as the greenback closed at CNY 8.1002, down from 8.1005 yesterday. On the political front, Chinese President Hu Jintao – who will visit the U.S. in September – will likely execute various trade and economic agreements between the U.S. and China next month.
The British pound scored marginal gains vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.8080 level and was supported around the $1.7975 level. Technically, today’s high in cable was right at the 76.4% retracement of the move from $1.8330 to $1.7275. Data released in the U.K. today saw business investment rise 0.5% q/q in Q2 at £28.26 billion, up 2.2% y/y. Also, BBA mortgage lending data were released and they saw a decline last month to £3.7 billion from June’s £4.7 billion level. Last month’s level represented the lowest figure since December 2001. Similarly, consumer credit landing was off 4.0% m/m in July. Cable offers are cited around the $1.8105/ 10 level. The euro was flat vis-à-vis the British pound as the single currency tested bids around the £0.6810 level and was capped around the £0.6825 level.
The Swiss franc gained ground vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.2560 level and was capped around the CHF 1.2655 level. Technically, today’s low was just above the 23.6% retracement of the move from CHF 1.3055 to CHF 1.2430. Dollar bids are cited around the CHF 1.2555/ 05 levels. The euro weakened vis-à-vis the Swiss franc as the single currency tested bids around the CHF 1.5465 level while the British pound fell sharply and tested bids around the CHF 2.2645 level.
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