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Friday September 16, 2005 - 14:30:21 GMT
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Forex Market Commentary and Analysis (16 September 2005)



The euro retraced most of its intraday gains vis-à-vis the U.S. dollar today as the single currency briefly printed above the US$ 1.2300 figure and remained supported around the $1.2205 level. Stops were hit below the $1.2225 level, representing the 23.6% retracement of the move from $1.2330 to $1.2190. Price activity was very volatile during early North American dealing after the release of many U.S. economic data. First, it was reported that the Q2 current account deficit actually narrowed marginally to US$ 195.66 billion from a revised $198.7 billion in Q1. This was worse-than-expected, however, and means the current account deficit is now equivalent to 6.4% of GDP. Data released shortly thereafter saw the July Treasury International Capital series of foreign inflows into U.S. asset markets print at US$87.4 billion, significantly higher than expectations and an indication that the U.S. economy successfully covered its trade deficit two months ago. Data released later in the session saw the mid-September University of Michigan consumer sentiment index print at 76.9, down from 89.1 at the end of August. This represented the lowest print since March 2003 and is probably the most current indicator of the impact that hurricane Katrina is having on national sentiment. Other recent indicators that are providing evidence of Katrina’s impact include a decline in industrial production, spike in initial jobless claims, lower weekly retail sales, and a significant drop in yesterday’s Philadelphia Fed index to 2.2 from 17.5. The University of Michigan consumer sentiment number was some nine index points lower than many forecasts. Despite Katrina’s obvious impact on the economy, most traders believe the Federal Open Market Committee will tighten monetary policy when policymakers convene on Tuesday. The most important byproduct of the meeting will be the language the Fed utilizes in its statement, especially whether or not the Fed retains its now-customary “measured pace” mantra. The big news for traders ahead of the Fed’s decision is this Sunday’s German national election in which Chancellor Schroeder’s Social Democrats are squaring off against Angela Merkel’s Christian Democrats. The race is too close to call at this point but the lack of a decisive victor on Sunday does not bode well for much-needed German economic reform. The Bush administration is said to favour the right-of-center Christian Democrats but even if they win, reform may take a back seat to politics because Merkel is said to not enjoy the same level of support that former Chancellor Kohl held in that party. Germany is the eurozone’s largest economy and has been a drag on EMU-12 economic growth for some time. In other eurozone news, the European Commission is expected to reduce its 2005 GDP forecast when it next convenes in November. Data released in the eurozone today saw July industrial output climb 0.2% m/m and 0.5% y/y while harmonized August HICP was up 2.2% y/y from a provisional 2.1%. The core measure was up 1.3% y/y, unchanged from July’s pace. Euro offers are cited around the $1.2345 level.

¥/ CNY

The yen lost ground vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥111.00 figure and was supported around the ¥110.45 level. Technically, today’s low represented the 50% retracement level of the short-term move from ¥110.15 to ¥110.90. Dealers reported less-than-normal liquidity in this pair on account of a three-day weekend in Japan and an unwillingness by many market participants to put on new positions. Minor data released in Japan overnight saw August crude steel output recede 1.7% y/y to 9.23 million tons. Economy Minister Takenaka spoke about deflation overnight and said “A mild deflation persists stubbornly and there are more obstacles we should overcome. The government and the Bank of Japan must step up cooperation to deal with (deflation).” His comments come after a week of fairly optimistic comments from Bank of Japan officials wherein they talked about the inevitable end of deflation and the beginning of a return to monetary normalcy. Many traders believe BoJ will begin to unwind its long-standing quantitative easing policy as early as H1 2006. The Nikkei 225 stock index shed 0.22% to close at ¥12,958.68. Dollar bids are cited around the ¥110.60/ 30 levels. The euro moved higher vis-à-vis the yen as the single currency tested offers just above the ¥136.00 figure and was supported around the ¥135.20 level. Stops were triggered above the ¥135.55 level and technically, today’s low represents the 61.8% retracement of the move from ¥133.50 to ¥137.85. The British pound and Swiss franc appreciated vis-à-vis the yen as the crosses tested offers around the ¥200.95 and ¥87.70 levels, respectively. The Chinese yuan appreciated vis-à-vis the U.S. dollar as the greenback close at CNY 8.0871, down from CNY 8.0887. China’s State Administration of Foreign Exchange talked about recent movements in the market and said “The yuan exchange rate has seen small movement in both directions (appreciation and depreciation) and expectations of the yuan appreciating have weakened since then.” It was reported that China’s foreign exchange reserves amounted to around US$ 740 billion at the end of July and many dealers expect China will overtake Japan next year as the world’s largest holder of foreign exchange reserves. The U.S. government today announced a new round of textile trade talks for 26-27 September. WSJ reported the Bush administration is becoming increasingly disappointed that China’s yuan currency hasn’t been revalued more since the 2.1% revaluation on 21 July. This may become topical again when G7 economic and financial officials convene in Washington, D.C. on 23-24 September. U.S. Treasury Secretary Snow is expected to meet with Chinese finance minister Jin Renqing around that time. Snow will then travel to China in mid-October and the U.S. Treasury report on international currency manipulation is then scheduled for release on 15 October.


The British pound came off vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.8020 level and was capped around the $1.8145 level. Technically, today’s high was right around the 23.6% retracement of the move from $1.8495 to $1.8035. There were no major U.K. economic data released today of note. Stops were triggered below the $1.8095 level. Cable offers are cited around the $1.8165 level. The euro moved marginally higher vis-à-vis the British pound as the single currency tested offers around the £0.6790 level and was supported around the £0.6770 level.

CHF

The Swiss franc lost marginal ground vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.2710 level and was supported around the CHF 1.2600 figure. Technically, the pair did not wander far below the 50% retracement level of the move from CHF 1.2525 to CHF 1.2690. Data released in Switzerland today saw Q2 industrial production, ex-construction, rose 4.0% y/y. Swiss National Bank yesterday released its quarterly monetary policy assessment and kept monetary policy and interest rates unchanged, as expected. Dollar bids are cited around the CHF 1.2610/ 1.2590 levels. The euro moved higher vis-à-vis the Swiss franc as the single currency tested offers around the CHF 1.5515 level while the British pound was flat vis-à-vis the Swiss franc after testing offers around the CHF 2.2940 level.

 

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