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Wednesday September 21, 2005 - 12:38:04 GMT
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Forex Market Commentary and Analysis (21 September 2005)

The euro appreciated sharply vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.2235 level and was supported around the $1.2110 level. Hurricane Rita was cited as the major reason for the dollar’s broad pullback today as traders-cum-meteorologists track the storm to see if it will impact the U.S. oil refining industries in the gulf region. A couple of themes are at work here. First, approximately 13% of the U.S.’s refining capacity is in the gulf region and most of it was temporarily taken offline or destroyed by hurricane Katrina. Traders await the release of the latest oil inventory report today for the latest status on Katrina’s impact. Second, dealers are becoming increasingly concerned with the US$ 200 billion+ price tag that some government officials are ascribing to the Katrina clean-up, including the rebuilding of New Orleans. The U.S. budget deficit is already bloated by Iraq and the war on terror and traders are closely watching to see if the Bush administration will decide to make some of its tax cuts non-permanent. Oil is again trading at a $67 handle and the dollar’s fortunes will be closely tied to crude futures and the path of Rita. The dollar’s misfortunes come one day after the Federal Open Market Committee tightened monetary policy by 25bps, lifting the federal funds target rate to 3.75% for the eleventh consecutive hike. Some Fed-watchers believed the Fed would pause in its current tightening cycle to gauge the financial and economic impact of Katrina. The Fed was sensitive to Katrina’s effects in its statement, noting “the associated dislocation of economic activity and the boost to energy prices imply that spending, production, and employment will be set back in the near term. In addition to elevating premiums for some energy products, the disruption to the production and refining infrastructure may add to energy price volatility. While these unfortunate developments have increased uncertainty about near-term economic performance, it is the Committee's view that they do not pose a more persistent threat.” Reiterating its long-standing mantra, the Fed added “policy accommodation can be removed at a pace that is likely to be measured.” There was an unusual dissention in yesterday’s vote with Governor Olson voting against the hike; this represented the first dissent since June 2003. The likely course of U.S. monetary policy likely includes between 25bps and 75bps of tightening through the first meeting of 2006 in late January, coincident with the retirement of Fed Chairman Greenspan. Some Fed-watchers believe Greenspan does not want to leave a legacy of not having fought inflation vigilantly enough and therefore he may be inclined to err on the side of caution by tightening policy rather than not tightening policy before his term expires. In eurozone news, EMU-12 provisional Q2 labour costs moved higher 2.3% y/y, below consensus forecasts and down from Q1’s 3.0% rise. European Central Bank President Trichet spoke today and said the eurozone’s 2005 and 2006 growth rates will be around 1.9% and above 2.0% in 2007. Trichet also said he “has no doubt” that the United Kingdom will adopt the euro “in the medium term.” European Central Bank policymaker Liebscher spoke today and said “the development of real estate prices in a few (EMU-12) countries does not pose a risk for the whole euro zone region.” Other data released in the eurozone today saw the EMU-12 current account deficit expand to -€5.9 billion in July from -€1.0 billion in June. Euro offers are cited around the $1.2245 level.

¥/ CNY

The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥111.10 level after testing offers around the ¥112.00 figure. Today’s intraday high represented the pair’s strongest print since 9 August and also represented the 23.6% retracement of the move from ¥106.45 to ¥113.70. Stops were triggered below the ¥111.45 level as traders sold dollars on account of the strengthening hurricane Rita near the already-devastated U.S. Gulf region. Bank of Japan Policy Board member Nishimura spoke today and defended the central bank’s maintenance of its current account surplus target of ¥30-35 trillion. Nishimura said Japan is not “facing any impending situation, such as (a surge in) inflation therefore we can manage the monetary policy with some latitude and I do not think there is a need to reduce the reserve target.” In contrast, some BoJ officials have recently voted for and called on the BoJ to lower its reserve surplus target from its current level. BoJ Governor Fukui has repeatedly said several criteria need to be met before the central bank will begin to unwind its long-standing quantitative easing policy, including consumer price growth above zero per cent. Nishimura was also optimistic about the impact of oil prices, predicting they will “not have a strong shock.” On the political front, Prime Minister Koizumi was formally reappointed to his post today by Japan’s parliament and reported there is more privatization to come. The Nikkei 225 stock index climbed 0.37% to close at ¥13,196.57. Dollar bids are cited around the ¥110.95/ 75 levels. The euro moved lower vis-à-vis the yen as the single currency tested offers around the ¥136.25 level and was supported around the ¥135.55 level. The cross briefly traded above the 38.2% retracement level 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 ¥201.80 and ¥87.80 levels, respectively. The Chinese yuan depreciated vis-à-vis the U.S. dollar as the greenback closed at CNY 8.0911, up from CNY 8.0890. A Ministry of Commerce official today called on People’s Bank of China to “widen the current movement limit from the current 0.3% to 1% fixed limit” and suggested “the creation of a forward trading market will help.”

The British pound moved sharply higher vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.8130 level and was supported around the $1.7960 level. Sterling moved to intraday highs after the release of the minutes from the September Bank of England Monetary Policy Committee meeting. The minutes revealed a unanimous 9-0 vote to keep the official report rate target unchanged at 4.50%. Sterling benefit from this because it implies the MPC’s decision to lower interest rates a couple of months ago was probably a one-off event. Recent data suggest the U.K. housing sector may be stabilizing after slowing and current U.K. inflation is above target, adding to the idea that the recent monetary expansion was a one-off event. The MPC characterized inflation expectations as “well anchored” but added there is “no room for complacency” in its minutes. The European Union today noted the European Commission will initiate an “excessive deficit procedure” against the U.K. for breaching the 3.0% debt-to-GDP ceiling limit of 3% in 2004 and 2005. Cable offers are cited around the $1.8165 level. The euro moved higher vis-à-vis the British pound as the single currency tested offers around the £0.6760 level and was supported around the £0.6730 level.


The Swiss franc gained significant ground vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.2680 level after encountering offers around the CHF 1.2825 level. Traders moved into Swiss francs on account of uncertainty regarding hurricane Rita and its impact on the global oil market. The rising price of gold may also be benefiting the Swiss franc. The franc, in fact, notched gains across most currencies on its crosses. Data released in Switzerland today saw July retail sales increase 1.6% y/y. Dollar bids are cited around the CHF 1.2600 figure. The euro and British pound moved lower vis-à-vis the Swiss franc as the crosses tested bids around the CHF 1.5505 and CHF 2.2930 levels, respectively.


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