Monday September 19, 2005 - 14:19:36 GMT
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Forex Market Commentary and Analysis (19 September 2005)
The euro lost major ground vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.2100 figure after failing to get above the $1.2175 level. The common currency gapped some 65 pips lower at the Australasian open from Friday’s close on account of a very close German federal election. Opposition candidate Angela Merkel’s Christian Democratic Union (CDU) is said to have narrowly defeated incumbent Gerhard Schroeder’s Social Democratic Party (SPD) but Schroeder has not yet conceded the election. If the vote is as close as provisional results suggest, it would mean the CDU has a mere three-seat advantage in parliament and the lack of a decisive electoral victor or dominant party in parliament likely means less economic and financial reform. German economic growth has been sub-par for years and traders had hoped that a clear winner would emerge on either side who would be able to encourage much-needed reform. The euro fell on the election news for this very reason. The most likely outcome is a coalition government but some traders are optimistic that a coalition government will be able to make some progress with regard to reform. Dealers will pay close attention to tomorrow’s Federal Open Market Committee meeting in which policymakers are likely to continue their tightening cycle and lift the federal funds target rate by 25bps to 3.75%. The Fed has hiked borrowing costs ten times since June 2004 to 3.50%. The major dilemma on traders’ minds is whether the Fed will pause tomorrow and not tighten policy on account of the unknown economic and financial impact of hurricane Katrina. Fed officials include Yellen, Moskow, and Santomero have recently signaled the Fed is likely to continue raising rates and policymakers have voiced their concern escalating inflationary pressures. The U.S. Congressional Budget Office has estimated Katrina will reduce 2005 growth between 0.5% and 1.0%. In eurozone news, French finance minister Breton predicted his country’s budget deficit will not be above 3.0% of GDP in 2005 or 2006. Bundesbank released a monthly report today and indicated the German economy was flat in Q2 compared with Q1 when it improved 0.6% y/y. Data released in Germany today saw August PPI up 0.3% m/m and 4.6% y/y. Euro offers are cited around the $1.2200/ 1.2255 levels.
The yen lost marginal ground vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥111.65 level and was supported around the ¥111.25 level. Technically, today’s low was right around the 23.6% retracement of the move from ¥109.90 to ¥111.65. Japanese financial markets were closed for a national holiday today and will be closed on Friday as well. This will be a very quiet week for the release of Japanese economic data with the tertiary industry index and all-industry activity index scheduled for release on Wednesday. Dollar bids are cited around the ¥110.95/ 55 levels. The euro lost ground vis-à-vis the yen as the single currency tested bids around the ¥135.00 figure after encountering resistance just below the ¥136.00 figure. Stops were reached below the ¥135.15 level. The British pound and Swiss franc weakened vis-à-vis the yen as the crosses tested bids around the ¥200.45 and ¥87.00 figures, respectively. The Chinese yuan depreciated vis-à-vis the U.S. dollar today as the greenback closed at the CNY 8.0908 level, up from Friday’s CNY 8.0871 level. People’s Bank of China included a statement about exchange rates in its latest quarterly monetary policy statement where in reported “China will maintain the basic stability of the yuan exchange rate at a reasonable and balanced level. Foreign exchange reform was carried out smoothly. The yuan exchange rate moved in both directions. There are signs of easing yuan appreciation expectations in the forward market.” PBOC also reported the economy is moderating slightly on account of the government’s control to ease growth. Assistant PBOC Governor Yi Gang warned speculators against betting too heavily on the yuan saying “If the yuan appreciation is around three pct within a year, then people converting large amounts of dollars to speculate on the yuan will lose money.”
The British pound moved lower vis-à-vis the U.S. dollar today as cable tested bids vis-à-vis the US$ 1.7970 level and was capped around the $1.8080 level. Technically, today’s high was right around the 76.4% retracement level of the move from $1.8330 to $1.7270. Data released in the U.K. today saw Rightmove report that September house prices fell 0.4% and were up a mere 1.6% y/y. Bank of England Monetary Policy Committee member Nickell was quoted in the Financial Times as saying the U.K. economy faces a “serious risk” that U.K. economic growth will fail to meet the Bank of England’s forecasts. Nickell alluded to waning consumption, heightened oil prices, household debt, and growing labour market slack. Cable offers are cited around the $1.8075/ 1.8175 levels. The euro came off vis-à-vis the British pound as the single currency tested bids around the £0.6720 level and was capped around the £0.6765 level.
The Swiss franc lost ground vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.2810 level and was supported around the CHF 1.2730 level. The pair gapped about 50 pips higher at the Australasian open following the uncertainty surrounding the German federal election. Stops were triggered above the CHF 1.2760 level during the move higher. Germany will hold its own national election on Friday. The Swiss August trade balance will be released on Thursday and Swiss National Bank member Hildrebrand will speak that day. Dollar bids are cited around the CHF 1.2700 figure. The euro came off marginally vis-à-vis the Swiss franc as the single currency tested bids around the CHF 1.5480 level while the British pound appreciated vis-à-vis the Swiss franc and tested offers around the CHF 2.3075 level.
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