Wednesday August 31, 2005 - 13:51:59 GMT
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GCI Financial - www.gcitrading.com
Forex Market Commentary and Analysis (31 August 2005)
The euro fell marginally vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.2190 level and was capped around the $1.2230 level. Traders remain focused on the devastation of hurricane Katrina on the U.S. economy and its ability to produce oil in the gulf. Katrina forced U.S. oil produces to curtail more than 10% of the country’s refining capacity and more than 25% of its oil output. This has precipitated a spike in energy prices and dealers fear this will be bad news for the U.S. dollar as it eats into a national savings rate that is already near zero per cent. Prior to this hurricane, the U.S. economy had weathered the spike in oil prices with relative ease. The will of consumers to continue spending will be closely watched in future numbers as final private demand plays a significant role in the U.S. economy. News that the Bush administration has decided to tap the Strategic Petroleum Reserves caused the price of crude to fall back to a $69 handle from yesterday’s record print of $70.85. Data released in the U.S. today saw revised Q2 GDP tick down to 3.3% from the advance 3.4% print as personal consumption fell to 3.0% from an advance level of 3.3%. The lingering question on traders’ minds is how the hurricane will impact U.S. monetary policy, if at all. The January fed funds futures contract is now pricing in only a 20% or so chance that the Federal Open Market Committee will tighten policy at the December meeting. Minutes from the 9 August FOMC meeting were released yesterday and policymakers expressed concern with the fact that inflation risks have “ticked up” recently. Fed officials were also concerned that higher energy costs would result in reduced consumer spending. There was some talk about whether the Fed needs to ratchet up the “measured pace” language that has accompanied its policy decisions for several meetings. Most traders are now concluding that given a choice, the Fed would move to contain inflation at the expense of growth. Dealers cited dollar buying by European insurers today who are said to have up to US$ 25 billion in insurance claims exposure to the hurricane. In eurozone news, French unemployment fell to 9.9% in July from 10.1% in June while Germany’s August unemployment rate printed at 11.4% with the jobless level down a mere 12,000 workers this month. All eyes will be on the German election scheduled for 17 September. Chancellor Schroeder’s Social Democratic Party has not done much to turn the German economy around and the opposition Christian Democratic Union is promising sweeping changes in the country’s labour laws in the first 100 days of their chancellorship if they succeed at the polls. Other data released in Germany today saw July wholesale sales up 1.5% m/m and 1.2% y/y while July retail sales were off 0.6% m/m and 3.0% y/y. Additional data released in the eurozone today saw EMU-12 GDP expand 0.3% q/q in Q2, unchanged from provisional estimates, while the EMU-12 harmonized index of consumer prices was up 2.1% y/y this month, down from July’s print of 2.2%. On the heels of these data, the European Commission maintained its current GDP forecasts for the eurozone at 0.2% to 0.6% and 0.4% to 0.8% in Q3 and Q4, respectively. Euro offers are cited around the $1.2275 level.
The yen extended recent losses vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥111.75 level and was supported around the ¥111.10 level. Stops were triggered above the ¥111.45 level but the pair failed to test technical resistance seen around the ¥111.85/ 90 level. The escalating price of oil is making it difficult for the yen to gain ground vis-à-vis any currency as Japan is a major oil importer. It was reported overnight that Japanese July crude oil imports receded 4.8% y/y, the first drop in three months, but crude’s recent price activity around the $70.00/ barrel level render it painful for the Japanese economy. Other data released in Japan overnight saw July housing starts rise 8.3% y/y, up from June’s 2.4% gain. Also, Japan’s 50 largest contractors reported that construction orders rose 20.8% y/y to ¥1.13 trillion last month, led by increases in both domestic private-sector orders and public-sector orders along with a spike in overseas orders. These data were tempered by a 1.1% m/m and 2.2% y/y decline in July industrial output. Manufacturers, however, are predicting that industrial output will rally 2.3% m/m in August and September. The Nikkei 225 stock index shed 0.32% to close at ¥12,413.60. Dollar bids are cited around the ¥110.95/05 levels. The euro extended recent gains vis-à-vis the yen as the single currency tested offers around the ¥136.30 level and remained supported around the ¥135.80 level. The British pound and Swiss franc appreciated vis-à-vis the yen as the crosses tested offers around the ¥199.45 and ¥88.05 levels, respectively. The Chinese yuan depreciated vis-à-vis the U.S. dollar today as the greenback closed at CNY 8.0998, up from CNY 8.0973 yesterday.
The British pound was largely flat vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.7895 level and was supported around the $1.7820 level. Sterling came off of intraday highs after it was reported that August GfK consumer confidence receded to -4 from -1 in July. This pullback in sentiment took place despite Bank of England’s move to lower interest rates this month. Many economists believe retail sales will continue to be hampered in the U.K. by the slowing housing market and recent terror attacks in London. Cable offers are cited around the $1.7960 level. The euro moved lower vis-à-vis the British pound as the single currency tested bids around the £0.6825 level and was capped around the £0.6855 level.
The Swiss franc gained ground vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.2660 level after being capped around the CHF 1.2700 figure. Technically, today’s high represents a major technical level, namely the 23.6% retracement of the move from CHF 1.1480 to CHF 1.3070. Data released in the Switzerland today saw the KOF leading indicator print at 0.71 in August, up from 0.64 in July. These data suggest Swiss economic growth will accelerate in Q4. Dollar bids are cited around the CHF 1.2630/ 1.2590 levels. The euro came off vis-à-vis the Swiss franc as the single currency tested bids around the CHF 1.5470 level while the British pound fell vis-à-vis the Swiss franc and tested bids around the CHF 2.2600 figure.
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