Thursday September 1, 2005 - 14:46:18 GMT
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Forex Market Commentary and Analysis (1 September 2005)
The euro appreciated vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.2415 level and was supported around the $1.2325 level. Technically, today’s high was above the 76.4% retracement of the move from $1.2485 to $1.2125 and chartists are now eyeing the $1.2485/ 95 levels as the next upside target, representing the 38.2% retracement of the move from $1.3480 to $1.1870. All eyes remain focused on the aftermath of hurricane Katrina in the southern U.S. and its economic and financial impact on the domestic economy there. Gasoline prices have skyrocketed in the U.S. and for a country with a savings rate near zero per cent, escalating energy prices could eat into final private demand. Some market participants are thinking the Federal Reserve will not move interest rates higher by 25bps at the September Federal Open Market Committee meeting and instead opt to assess and survey the financial implications of Katrina. Philadelphia Fed President Santomero yesterday said he believes the economy will slow as a result of Katrina but added the U.S.’s economic expansion “is strong enough to withstand (the impact).” Many economic data were released in the U.S. today. First, it was reported that July personal income was up +0.3% while personal savings printed at +1.0% with June’s total upwardly revised. The PCE deflator moved higher to 2.5% from 2.2% while core personal consumption expenditures – a favourite Fed measure of price pressures – was up +0.1%. Weekly initial jobless claims climbed 3,000 to 320,000. Other data released today saw the August ISM manufacturing index came in at 53.6, down from 56.6 in July. The new orders sub-index fell to 56.4 from 60.6 while the employment index fell to 52.6 from 53.2. The market’s preoccupation with hurricane Katrina has resulted in the U.S. dollar being largely unable to gain ground from positive U.S. economic data, an asymmetric effect. Most, if not all, of the economic data being released now were calculated and compiled before Katrina struck the U.S. and the data generally paint a picture of an economy that evidenced some deceleration in economic activity over the past one or two months. In eurozone news, European Central Bank voted to keep interest rates unchanged at 2.0%, as expected. The ECB has not changed rates since June 2003 and traders are curious to see what ECB President Trichet will say in his post-meeting comments today. The recent increase in the eurozone’s M3 money supply has some dealers believing the ECB has become more hawkish while others believe the ECB will tread cautiously given the current spike in energy prices. Most traders believe the ECB will not change policy until Q1 2006 and that is likely to be a monetary tightening. Data released in the eurozone today saw August EMU-12 manufacturing PMI recede to 50.5 from 50.8 in July while the EMU-12 July unemployment index fell to 8.6% from 8.7% in June. Germany’s manufacturing PMI rate contracted to 48.7 from 49.8 in July. All eyes are on tomorrow’s U.S. August non-farm payrolls report. Weakness in today’s U.S. ISM manufacturing index and the employment sub-index could evidence a pullback in employment. Euro offers are cited around the $1.2495/ $1.2645 levels.
The yen extended yesterday’s gains vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥110.30 level and was capped around the ¥110.90 level. Technically, today’s high was around the 38.2% retracement of the move from ¥106.45 to ¥113.70 and today’s low represents the 61.8% retracement of the move from ¥109.35 to ¥111.75. Exactly which country will be the biggest loser following the current spike in crude oil prices remains to be seen. Japan, like many Asian countries, is a major importer of crude and energy and there has been historically strong inverse correlation between escalating crude prices and yen weakness. The damage inflicted by hurricane Katrina on the U.S.’s ability to refine and produce oil domestically, however, may mean less yen damage and more trouble for the U.S. dollar. Capital flows data released overnight saw Japanese investors as net buyers of ¥188.5 billion in foreign bonds during the week of 21 – 27 August, the eighth consecutive week of net buying activity. Similarly, Japanese investors purchased a net ¥25.1 billion in foreign equities last week and have been net buyers of equities for 25 of the 34 past weeks. Foreign investors purchased a net ¥382.9 billion on Japanese equities last week, the eleventh consecutive week they were net buyers, but sold more short-term Japanese debt than the mid-term and long-term bonds they purchased last week. The Nikkei 225 stock index gained 0.75% today to close at ¥12,506.97. Dollar bids are cited around the ¥110.10/ ¥109.25 levels. The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥137.15 level and was supported around the ¥136.40 level. The British pound and Swiss franc appreciated vis-à-vis the yen as the crosses tested offers around the ¥200.65 and ¥88.65 levels, respectively. In Chinese news, Bank of China has become the first bank to obtain approval from China’s foreign exchange regulator to offer yuan swaps. Data released in China today saw the August purchasing managers index print at 52.6, up from July’s tally of 51.1. U.S. and Chinese textile talks continue in Washington D.C. today just a few days before Chinese President Hu’s first official trip to the U.S. Hu is scheduled to meet President Bush next week.
The British pound gained major ground vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.8250 level, its strongest rate since 28 June and right around the 50% retracement of the move from $1.9215 to $1.7270. Data released in the U.K. today saw the August manufacturing PMI number improve to 50.1 from 49.5 in July. Also, Nationwide reported that August house prices were down 0.2% m/m and off 2.3% y/y meaning house price inflation reached its lowest level in more than nine years. August construction PMI will be released tomorrow. Cable offers are cited around the $1.8330 and $1.8470 levels. 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 £0.6850 level.
The Swiss franc gained significant ground vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.2380 level and was capped around the CHF 1.2560 level. Stops were triggered below the CHF 1.2465 and 1.2405 levels, key technical levels of support. Chartists are now eyeing the CHF 1.2275 level on the downside. Data released in Switzerland today saw August CPI climb 0.1% m/m and 1.0% y/y, consistent with forecasts. Some dealers believe the Swiss franc is currently benefiting from so-called safe haven buying of francs for dollars. Dollar bids are cited around the CHF 1.2250 level. The euro moved lower vis-à-vis the Swiss franc as the single currency tested bids around the CHF 1.5435 level while the British pound gained marginal ground vis-à-vis the Swiss franc and tested offers around the CHF 2.2655 level.
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