Friday August 26, 2005 - 14:24:24 GMT
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Forex Market Commentary and Analysis (26 August 2005)
The euro gained ground vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.2335 level and was supported around the $1.2280 level. Stops were reached above the $1.2315/ 20 level, representing the 50% retracement of the move from $1.2485 to $1.2125. Federal Reserve Chairman Greenspan is scheduled to speak today at the Kansas City Federal Reserve Bank’s annual symposium in Jackson Hole, Wyoming. Greenspan is not expected to speak about monetary policy but is expected to talk about his tenure at the Fed, scheduled to conclude on 31 January 2006. Greenspan’s remarks, however, expressed concern with low risk premiums and the fiscal and trade deficits and said asset prices are becoming an increasingly important component of monetary policymaking. Recent comments from Fed officials including Chicago Fed President Moskow and Richmond Fed President Lacker have been hawkish thus traders are alert to any official comments that evidence concern over inflation. Dealers are focusing on next week’s U.S. jobs report for August, scheduled for release on 2 September. Early forecasts are calling for around 190,000 new jobs to have been created this month. Data released in the U.S. today saw the final August University of Michigan index decline to 89.1 from 96.5 in July and 92.7 in early August. The expectations index receded to 76.9 from 88.5 and the current conditions index fell to 108.2 from 113.5 in July. In eurozone news, traders are talking about the election in Germany scheduled for 18 September. Chancellor Schroeder’s Social Democratic Party remains the underdog in national polls and the prospect of a weak coalition government following the election could hurt the euro as it could make economic and financial reform in Germany – the eurozone’s largest economy – more difficult to achieve. Traders are focusing on the recent growth in the eurozone’s M3 money supply. The measure grew at its fastest pace since October 2003 in July and this is important because many European Central Bank-watchers believe the central bank is becoming more hawkish and will tighten monetary policy in the first half of 2006, if not sooner. M3 was up 7.9% y/y last month from a revised 7.6% rate in June. Euro offers are cited around the $1.2345/ 50 level.
The yen gained ground vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥109.35 level after encountering offers around the ¥110.35/ 40 level. Chartists are eyeing the ¥109.25/ 20 level as the next significant support level for the pair with stronger demand anticipated around the ¥108.90 level. The pair was offered during Australasian dealing following a report that the Al Qaeda terror network is planning to attack major Asian cities, possibly including Tokyo. The yen regained its footing, however, and followed Japanese equities into positive territory. Data released in Japan overnight saw the July core consumer price index receded 0.2% y/y, consistent with expectations and the latest evidence that deflation remains a problem in the economy. Bank of Japan will maintain its long-standing quantitative easing policy until inflation emerges and there is no chance that deflation will re-emerge. Some economists believe inflation will be positive from October. Tokyo-area core CPI gained 0.3% m/m this month but was off 0.3% y/y, the 71st consecutive month of decline. The Japanese political scene will continue to be the focus of traders over the next couple of weeks as Prime Minister Koizumi’s snap election is scheduled for 11 September. Koizumi, who called the snap election after failing to move his postal privatization agenda through parliament, is likely to win the election and continue his reform-minded agenda that many market participants is benefiting Japan’s economy and, by association, the yen. The Nikkei 225 stock index climbed 0.28% to close at ¥12,439.48. Dollar bids are cited around the ¥109.25/ 108.90 levels. The euro wobbled lower vis-à-vis the yen as the single currency tested bids around the ¥134.80 level after failing to get above the ¥135.70 level. The British pound and Swiss franc came off vis-à-vis the yen as the crosses tested bids around the ¥197.60 and ¥87.15 levels, respectively. The Chinese yuan appreciated vis-à-vis the U.S. dollar as the greenback closed at CNY 8.0965, down from 8.1002 yesterday. The dollar lost ground amid heightened speculation that China may soon revalue its yuan again following its 2.1% revaluation on 21 July. People’s Bank of China tried to head off speculation overnight when it issued a statement that read “The yuan's exchange rate is decided by market forces. The issue of a preliminary revaluation or there being a further revaluation does not exist.” Chinese President Hu will visit the U.S. on 7 September and apart from the economic and business agreements he is likely to execute with President Bush and others, many believe another revaluation is in the cards. It was also reported overnight that China will allow nine foreign banks to trade yuan forwards on the interbank market. Data released in China overnight saw January – July fiscal revenue up 15.2% y/y to CNY 1.936 trillion. Six-month yuan forwards are currently trading around 7.9850 to the U.S. dollar. People Bank of China’s Yu Yongding spoke overnight and said the recent revaluation will hurt some imports but lessen the country’s demand on exports.
The British pound moved higher vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.8075 level and was supported around the $1.7990 level. Today’s high was just below the 76.4% retracement of the move from $1.8330 to $1.7270. Data released in the U.K. today saw Q2 GDP upwardly revised to reflect improved industrial sector activity. GDP rose 0.5% q/q and 1.8% y/y but the annual growth rate remains the lowest since Q1 2002. Other data released today saw John Lewis Partnership department store sales fall 4.2% in the week to 20 August. Bank of England Chief Economist Bean is scheduled to speak tonight followed by Governor King tomorrow. Cable offers are cited around the $1.8105 level. The euro came off marginally vis-à-vis the British pound as the single currency tested bids around the £0.6810 level and was capped around the £0.6830 level.
The Swiss franc gained marginal ground vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.2525 level after failing to get above the CHF 1.2585 level. The pair’s high was just above the 23.6% retracement level of the move from CHF 1.3055 to CHF 1.2430. Dollar bids are cited around the CHF 1.2505 level. The euro was little-changed vis-à-vis the Swiss franc as the single currency tested offers around the CHF 1.5470 level while the British pound was up vis-à-vis the Swiss franc and tested offers around the CHF 2.2710 level.
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