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Thursday September 8, 2005 - 14:15:08 GMT
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Forex Market Commentary and Analysis (8 September 2005)

The euro gained marginal ground vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.2450 level and remained supported around the $1.2400 figure. Technically, today’s high is just below the 38.2% retracement level of the move from $1.2535 to $1.2400. The common currency went offered yesterday, however, after fairly hawkish comments from Chicago Fed President Moskow who stressed the inherent difficult of assessing hurricane Katrina’s economic and financial impact on the U.S. economy. Moskow, however, reiterated that inflation remains a threat for the U.S. economy and traders interpreted his remarks as an indication the Federal Open Market Committee will revert to a contractionary policy even if it pauses in its current tightening cycle on 20 September. Notably, the Fed has raised interest rates ten times since June 2004 but traders are currently divided with one camp believing the Fed will not raise rates this month on account of Katrina while another camp believes the Fed will raise rates regardless. Most traders also believe the Fed will tighten policy in November and perhaps in December as well. Another factor in the Fed’s decision-making likely involves the price of oil. After spiking to above the psychologically-important US$ 70.00 figure after Katrina struck, crude oil futures are trading with a $64.00 handle and the moderation in prices gives the Fed some room to move on policy. Another factory that could benefit the dollar over the next couple of weeks is the general election in Germany on 18 September. Chancellor Schroeder’s Social Democratic Party is still trailing the Christian Democrats in the polls but is said to be gaining ground. The possibility of political stalemate following the elections renders it more possible that much needed economic reforms in Germany may not materialize for some time, and inhibit German growth. As the eurozone’s largest economy, Germany’s sub-par economic performance has been a drag on EMU-12 GDP for some time. Data released in the U.S. today saw weekly initial jobless claims recede 1,000 to 319,000 even though these claims include some 10,000 claims related to Katrina. On the employment front, Congress is predicting that employment may be reduced by some 400,000 workers in the near-term with non-farm payrolls off 500,000 to one million this month. Other U.S. data to be released today include July wholesale inventories, wholesale sales, and consumer credit. San Francisco Fed President Yellen is scheduled to speak later today and her comments about the economy will also be closely scrutinized. In eurozone news, the European Central Bank released its monthly economic report today and indicated it needs to exercise “particular vigilance” on eurozone inflation risks, noting “the balance of risks to the baseline inflation scenario is tilted to the upside.” The ECB also predicted that many eurozone governments will register fiscal deficits in 2005 and 2006 that are at or in excess of the 3.0% of GDP limit imposed by the EU’s Stability and Growth Pact. Specifically, it identified Germany, France, Italy, Portugal, and Greece as being in jeopardy. ECB’s Bini-Smaghi today repeated calls for EMU-12 countries to coordinate their budget plans to improve the eurozone economy. Euro offers are cited around the $1.2470 level.

¥/ CNY

The yen extended recent losses vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥110.60 level and was supported just below the ¥110.00 figure. Technically, today’s low was right around the 38.2% retracement level of the move from ¥104.15 to ¥113.70. Bank of Japan Governor Fukui today said “I understand that the economy here is now seeing a well-balanced recovery and that it is moving to attain long-lasting growth, albeit at a moderate pace.” He said a gradual increase in bank lending “will start serving as a driving force to push up Japan’s money supply.” Regarding monetary policy, Fukui added “When inflation risks are low we can manage our monetary policy with some latitude, until the nationwide core consumer price index starts to move stably above zero” and reiterated the central bank is closely watching developments related to crude oil prices. Fukui was speaking the same day Bank of Japan’s Policy Board voted 7-2 to keep policy unchanged, as expected. The BoJ also upgraded its assessment of the economy for the third consecutive month overnight. In his remarks, Fukui was referring to the lack of demands from Japanese financial institutions and its impact on the money supply. Data released today saw August bank lending off 2.2% y/y, the 92nd consecutive monthly decline. Other data released today saw July core private-sector machinery orders fall 4.3% m/m while the August M2+CDs measure was up 1.7% y/y, the same rate of increase as July’s tally. Also, the economy watchers’ index was released today and it rose in August for the first time in two months with the current conditions index printing at 50.5 and the forward-looking index at 51.9. Moreover, August machine tool orders improved 5.2% y/y. Capital flows data released overnight saw Japanese investors at net buyers of ¥827.7 billion in mid- and long-term foreign debt, the ninth consecutive week of being net buyers. Likewise, Japanese investors were net buyers of ¥22.9 billion in foreign equities and have been net buyers for 26 of the previous 35 weeks. Foreign investors accumulated a net ¥249.8 billion of Japanese equities last week, the twelfth consecutive week they were net buyers, and were net buyers of ¥185.2 billion of overall Japanese debt. Many Japan-watchers are now predicting that forthcoming quarter-on-quarter Japanese GDP data may be upwardly revised, perhaps to +0.5% q/q and +2.0% y/y. The Nikkei 225 stock index shed 0.58% to close at ¥12,533.89. Dollar bids are cited around the ¥109.30 level while dollar offers are seen around the ¥110.95 level. The euro added to recent gains vis-à-vis the yen as the single currency tested offers around the ¥137.30 level and remained supported around the ¥136.55 level. The British pound and Swiss franc appreciated vis-à-vis the yen as the crosses tested offers around the ¥203.45 and ¥89.00 levels, respectively. The Chinese yuan depreciated vis-à-vis the U.S. dollar as the greenback closed at the CNY 8.0945 level, up from CNY 8.0925 yesterday. The Asian Development Bank released a forecast today that predicts Chinese economic growth will moderate in H2 but still register around 9.2% for 2005.

The British pound moved higher vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.8440 level and was supported around the $1.8330 level. Technically, today’s high was about 30 pips below the 61,8% retracement level of the move from $1.9215 to $1.7265. Bank of England’s Monetary Policy Committee today decided to keep interest rates unchanged, as expected, after moving them lower last month by +25bps. This benefited sterling today because it maintains the current interest rate differential that the U.K. has over the U.S. Data released in the U.K. today saw July new construction orders up 6.0% y/y in July. Cable bids are cited around the $1.8335 level while cable offers are seen around the $1.8470 level. The euro lost ground vis-à-vis the British pound as the single currency tested bids around the £0.6740 level.


The Swiss franc appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.2385 level and was capped around the CHF 1.2440 level. Technically, today’s high was around 25 pips below the 38.2% retracement of the move from CHF 1.1480 to CHF 1.3080. Data released in Switzerland today saw August unemployment print at 3.6%, up from July’s 3.5% level. Q2 Swiss GDP data will be released tomorrow. Dollar offers are cited around the CHF 1.2465 level. The euro came off vis-à-vis the Swiss franc as the single currency tested bids around the CHF 1.5415 level while the British pound moved higher and tested offers around the CHF 2.2880 level.


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