Friday September 2, 2005 - 14:30:00 GMT
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Forex Market Commentary and Analysis (2 September 2005)
The euro added to recent gains vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.2585 level and was supported around the $1.2465 level. Today’s intraday high represented the pair’s strongest print since 26 May of this year and was about 30 pips higher than the 38.2% retracement of the 2005 range. The common currency gave up gains, though, after the release of decent August non-farm payrolls data that saw the unemployment rate dip to a four-year low of 4.9%. Around 169,000 new jobs were added last month, some 20,000 to 25,000 fewer than economists anticipated, while July’s non-farm payrolls number was upwardly revised to 242,000 preliminary estimates of 207,000. Notably, the August gains do not reflect any effects from hurricane Katrina as the compilation period concluded before the hurricane struck. Today’s data mean that a net 1.43 million new jobs have been created in 2005 to date. Other data released today saw average hourly earnings climb 0.1% m/m. Albeit the Federal Reserve is concerned about wage price pressures, average hourly earnings have climbed 2.7% in the past year, less than the 3.2% increase in consumer prices during the same time. A separate measure of employment today – the household survey – reported employment rallied by 373,000 to 149.8 million last month. The big question on traders’ minds now is whether the economic and financial impact from Katrina will force the Federal Reserve to pause in its current monetary tightening cycle. There has been a very high positive correlation this week between federal funds futures and the U.S. dollar. Traders are currently pricing in a 70% chance that the Fed will move rates higher by 25bps on 20 September when the Federal Open Market Committee convenes. A 25bps hike would take the federal funds target rate up to 3.75% and the question would then become whether the Fed ends the year there, at 4.00%, or at a hawkish 4.25%. The markets were abuzz with rumours yesterday as Fed Chairman Greenspan had lunch with President Bush to discuss the initial assessment of Katrina’s devastation. Many traders believe the U.S. economy will absorb the impact of the hurricane with aplomb. Oil prices are receding at the present time and front-month NYMEX futures are currently trading around $68.05. News that Europe may utilize its emergency reserves to assist the U.S. helped the price of crude to moderate today. In eurozone news, the Italian June trade balance deficit printed at €588 million, compared with €1.181 billion one year ago. European Central Bank President Trichet spoke after the ECB decided to keep interest rates unchanged yesterday for the 27th time since June 2003. Trichet said inflation risks are skewed to the upside and added policymakers “remain vigilant.” Euro offers are cited around the $1.2670 level.
The yen gained marginal ground vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥109.20 level and was capped around the ¥110.05 level. Technically, today’s high is right around the 38.2% retracement level of the move from ¥104.15 to ¥113.70 and today’s low is right around the 61.8% retracement of the move from ¥106.50 to ¥113.70. The pair is poised to close the week at its lowest level since the week ending on 12 August and chartists are now eyeing the ¥108.90/ 20 levels as downside targets. Data released in Japan today saw the August monetary base expand 1.1% y/y, the lowest rise since January 2001. This is indicative of growing reluctance by Japanese financial institutions to maintain funds at Bank of Japan. The central bank has maintained an unorthodox quantitative easing policy since March 2001 and many BoJ-watchers expect Japan will finally emerge from deflation later this year or early next year. The short-term outlook for the yen will probably be closely linked to the price of crude oil. The Nikkei 225 stock index gained 0.74% to close at ¥12,600.00. Dollar bids are cited around the ¥108.90/ ¥107.80 levels. The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥137.85 level and was supported around the ¥137.10 level. The British pound and Swiss franc appreciated vis-à-vis the yen as the crosses tested offers around the ¥202.15 and ¥89.30 levels, respectively. The Chinese yuan appreciated vis-à-vis the U.S. dollar today as the greenback closed at the CNY 8.0935 level, down from 8.0949 yesterday. China’s National Development and Reform Commission today reported that export growth with decelerate in H2 2005 and H1 2006. China’s exports in July grew 30% y/y to US$65.58 billion, the lowest monthly increase in 2005. There remains widespread speculation that China will again revalue the yuan currency following its 2.1% appreciation on 21 July. Chinese President Hu Jintao will visit the U.S. from 5 September to 17 September and the current textile row between the U.S. and China will likely be in focus.
The British pound appreciated vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.8430 level and was supported just above the $1.8300 figure. Today’s high represents the pair’s highest level since 19 May. Data released in the U.K. today saw August construction activity improve to 57.4 from 54.7, a sixteen-month high. The pair is poised to close at its strongest weekly level since the week ending in 13 May. Cable offers are cited around the $1.8470 level. The euro moved higher vis-à-vis the British pound as the single currency tested offers around the £0.6845 level and was supported around the £0.6810 level.
The Swiss franc moved higher vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.2250 level and was capped around the CHF 1.2365 level. Today’s low is the pair’s weakest print since 24 May and technically, today’s low represents the 61.8% retracement of the move from CHF 1.1740 to CHF 1.3080. Dollar bids are cited around the CHF 1.2090 level. The euro came off vis-à-vis the Swiss franc as the single currency tested bids around the CHF 1.5405 level while the British pound tested bids around the CHF 2.2525 level.
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