Monday September 12, 2005 - 14:39:13 GMT
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Forex Market Commentary and Analysis (12 September 2005)
The euro moved sharply lower vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.2280 level, its weakest showing since 31 August. Stops were triggered below the $1.2345 level, representing the 38.2% retracement of the move from $1.3125 to $1.1870. Technically, the common currency has retraced 38.2% of its move from $1.1875 to $1.2585. One factor that knocked the euro lower today was next Sunday’s German election and public opinion polls showing a close race between Angela Merkel’s Christian Democratic Party and incumbent Chancellor Schroeder’s Social Democratic Party. The prospect of a less-than-decisive victory by either party is euro-negative because it suggests a political stalemate could emerge through which very little much-needed economic reform in Germany is enacted. Germany has the largest economy in the eurozone and years of sub-par economic growth and a ballooning fiscal deficit remain significant EMU-12 issues. Another issue that is hindering the common currency is a reduction in the price of crude oil. NYMEX crude futures have today been trading with a $63.00 handle while London Brent crude futures have been trading with a $62 handle. This is a far cry from the record $70.85 level the markets saw at the end of August and eases some fears in traders’ minds about the impact of hurricane Katrina on the U.S. economy. European Central Bank President Trichet today said policymakers observe a “dynamic global economy” despite elevated energy costs. Eurozone finance ministers convened this weekend and called on the ECB to lower rates and limit the impact of oil prices with “an appropriate policy response.” German CPI data will be released tomorrow. Euro offers are cited around the $1.2315 level.
The yen depreciated vis-à-vis the U.S. dollar today as the greenback tested offers just below the ¥110.00 figure and was supported just above the ¥109.00 figure. The pair gapped 35 pips lower at the Australian open following the resounding political victory by Prime Minister Koizumi and his revamped Liberal Democratic Party. Traders bought yen on Koizumi’s decisive victory under the premise that he will have enough support within his own LDP and the lower house of parliament to continue his reform-minded agenda, including the controversial US$ 3 trillion+ privatization of the postal system. Koizumi has vowed that he will not remain in office past September 2006. Data released in Japan today saw the August corporate goods price index rise 0.2% m/m and 1.7% y/y, the second consecutive monthly increase. Also, the July current account surplus rose 0.8% to ¥1.650 trillion. Perhaps the most important data released today saw April – June GDP growth upwardly revised to 0.8% from 0.3% and an annualized rate of 3.3% from 1.1%. Domestic demand and business investment were both upwardly revised to contribute strongly to the improved GDP results. The Nikkei 225 stock index moved 1.61% higher to close at ¥12,896.43. Notably, foreign investors have purchased more than ¥3 trillion in equities over the past two months. Dollar bids are cited around the ¥109.25 level. The euro came off sharply vis-à-vis the yen as the single currency tested bids around the ¥134.90 level after gapping 90 pips at the open. The British pound and Swiss franc depreciated vis-à-vis the yen as the crosses tested bids around the ¥200.15 and ¥87.35 levels, respectively. The Chinese yuan appreciated vis-à-vis the U.S. dollar today as the greenback closed at the CNY 8.0924 level, down from Friday’s close of CNY 8.0956. Data released in China today saw January – August CPI up 2.1% y/y with August exports up 32.1% y/y and imports up 23.4% y/y. The January – August trade surplus printed at US$ 60.22 billion. Notably, however, August CPI was up 1.3% y/y, the lowest increase since September 2003 and this has rekindled talk of deflation possibly materializing in the Chinese economy next year. People’s Bank of China Governor Zhou was quoted as saying “We do not want to take any initiative in our foreign exchange reserve weightings that would trigger turbulence in the financial markets. We will not take any incautious action in terms of this aspect. Yuan revaluation should be conducted proactively, under control, and in a gradual way." Some dealers believe China may try to reduce its holdings of U.S. dollars at some point as it diversifies into other currencies as part of its currency basket. It is estimated by some that China could overtake Japan as the world’s largest holder of foreign exchange reserves in H1 2006. Zhou added “"After the exchange rate mechanism reforms, the central bank will reduce foreign exchange purchases in the market to allow companies to hold more foreign currency. There will also be more private investment in US dollars, euros and yen.”
The British pound fell sharply vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.8225 level, its weakest showing since 1 September. Stops were reached below the $1.8240 level that represents the 50% retracement of the move from $1.9215 to $1.7270. U.K. Chancellor of the Exchequer was quoted as saying elevated energy prices pose “significant downside risks” to global economic growth. Data released in the U.K. today saw August input prices rise 0.2% m/m, down from July’s acute 2.5% increase, and up 12.7% y/y, down from July’s +14.0% y/y pace. The government also reported that annual house price inflation in the U.K. receded to 4.0% in July from 5.0% in June. Other data released today saw U.K. productivity some 24% lower than the U.S.’s levels in 2004. Cable offers are cited around the $1.8310 level. The euro moved lower vis-à-vis the British pound as the single currency tested bids around the £0.6710 level and was capped around the £0.6750 level.
The Swiss franc lost major ground vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.2575 level and was supported around the CHF 1.2425 level. Technically, the pair has now retraced 38.2% of the move from CHF 1.1740 to CHF 1.3080. Stops were reached above the CHF 1.2465 level. Swiss National Bank will release its quarterly monetary policy assessment on Thursday and is not expected to change monetary policy. Dollar bids are cited around the CHF 1.2405 level. The euro and British pound moved higher vis-à-vis the Swiss franc as the crosses tested offers around the CHF 1.5445 and CHF 2.2985 levels, respectively.
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