Monday August 29, 2005 - 14:46:43 GMT
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Forex Market Commentary and Analysis (29 August 2005)
The euro was marginally stronger vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.2345 level and remained supported around the $1.2280 level. Technically, today’s high was right at the 38.2% retracement of the move from $1.3125 to $1.1865. Traders are still talking about comments that Federal Reserve Chairman Greenspan made on Friday at the annual Kansas City Federal Reserve Bank symposium in Jackson Hole, Wyoming. Greenspan was quite cautious on the U.S. economy and warned that final private demand “cannot be relied upon” to power U.S. economic growth in the medium-term. Greenspan also warned that the U.S. housing “will eventually simmer down” and said asset prices are playing an increasingly significant role in monetary policymaking. Greenspan also reiterated his opposition to the adoption of a formal inflation target at the Fed. Traders will closely watch this Friday’s U.S. August non-farm payrolls report, tomorrow’s consumer confidence survey, the Chicago PMI survey scheduled for Wednesday, and the ISM survey on Thursday. U.S. bond prices have rallied lately - reflecting in part the price of oil, weaker consumer sentiment, and a general unease with the U.S. economy. This week’s data, therefore, will be key for the financial markets, especially the jobs report on Friday. In eurozone news, the European Central Bank will announce its monetary policy decision on Thursday. ECB officials are not expected to change monetary policy until next year at the earliest but many dealers believe ECB President Trichet will adopt an increasingly positive tone when he speaks on Thursday. At the Fed symposium, Trichet said “Our credibility has enabled us to regain full control of inflationary expectations with remarkable efficiency over the last two years. And this was because observers and market participants rightly had the intimate conviction that we intended to be absolutely ready to act at any time if needed.” Regarding raising interest rates, Trichet said “Stability in long-term inflation expectations was restored without engineering policy actions. The easing cycle that started in 2001 has not been reversed yet.” Data released in the eurozone today saw the German GfK consumer climate index print at 3.2 this month, down from 3.4 in July. On the political front, French president Jacques Chirac said the European Union should agree on the 2007-2013 EU budget by the end of the year. Euro offers are cited around the $1.2375/ $1.2485 levels.
The yen moved lower vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥110.55 level and was supported around the ¥109.80 level. Technically, the pair is trading between the 23.6% and 38.2% retracements of the move from ¥104.20 to ¥113.70. A couple of things dragged the yen lower today. First, hurricane Katrina is set to make landfall in the U.S. gulf region and the price of oil skyrocketed as a result with front-month NYMEX crude futures trading at $70.80 today. Similarly, Tokyo benchmark crude futures traded at a record high of ¥42,140 overnight. Japan, like most of Asia, is a heavy importer of oil and there has been a traditional correlation between elevated oil prices and yen weakness. Second, the latest opinion polls in Japan ahead of the general election on 11 September show a narrowing lead for Prime Minister Koizumi and his Liberal Democratic Party. Koizumi champions privatization of the massive postal savings system and a continuation of the economic and financial reforms he has already enacted. Any chance that these reforms – some of which are designed to help Japan emerge from its decade-long battle with deflation – are blocked can hurt the yen. The Nikkei 225 stock index shed 1.04% to close at ¥12,309.83. Dollar bids are cited around the ¥109.25 level. The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥136.10 level and was supported around the ¥135.20 level. The British pound and Swiss franc moved higher vis-à-vis the yen as the crosses tested offers around the ¥199.40 and ¥88.10 levels, respectively. The Chinese yuan appreciated vis-à-vis the U.S. dollar as the greenback closed at the CNY 8.0954 level, down from Friday’s close of CNY 8.0965. People’s Bank of China Governor Zhou spoke at the Federal Reserve’s symposium this weekend and confirmed that its recent exchange rate adjustment was “not a one-time adjustment.” Zhou said China’s “domestic demand policy” is more important than its exchange rate policy and said China will try to slow the investment component of its economy. Interestingly, an assistant to Zhou was quoted as saying “market forces will determine the exchange rate” and suggested the revaluation was a one-time event, contradicting Zhou’s statement. In other PBOC news, China has delayed the launch of its yuan market-maker system that will broaden the foreign exchange market in China. Chinese President Hu Jintao will visit the U.S. on 7 September.
The British pound gained marginal ground vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.8085 level and was supported around the $1.8010 level. Technically, today’s high was right at the 76.4% retracement of the move from $1.8330 to $1.7270. Liquidity was thin today on account of the Summer Bank holiday in the U.K. and will normalize tomorrow. Bank of England Governor King spoke on Saturday and hawkishly warned that “Inflation expectations may be sensitive to a large but temporary shock that moved inflation outside the range within which it has remained for years.” King voted against the decision to raise interest rates last month at the Bank of England, arguing it was too soon to declare that inflationary pressures are no longer a threat. Data released in the U.K. today saw Hometrack house prices fall 3.7% over the last twelve months and have fallen for fourteen consecutive months. Cable bids are cited around the $1.7960/ 25 levels. The euro came off 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 was little-changed vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.2505 level and tested offers around the CHF 1.2595 level. Technically, today’s low was just below the 76.4% retracement of the move from CHF 1.2430 to CHF 1.2785. Swiss CPI and PMI data will be released on Thursday. Dollar bids are cited around the CHF 1.2540 level. The euro was flat vis-à-vis the Swiss franc as the single currency remained bid around the CHF 1.5425 level while the British pound moved higher vis-à-vis the Swiss franc and tested offers around the CHF 2.2695 level.
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