Tuesday October 4, 2005 - 17:34:30 GMT
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Forex Market Commentary and Analysis (4 October 2005)
The euro moved higher vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.1950 level and briefly traded just below the $1.1900 figure. This represents the first time the common currency has traded with a $1.18 handle since 8 July. Interest rate expectations continue to support the dollar. Atlanta Fed President Guynn yesterday said the Federal Reserve “has a way to go” in its current tightening cycle. The core personal consumption expenditures index was last week reported to be up +2.0%, above-trend and an indication that inflation pressures are on the rise. Dallas Fed President Fisher and Philadelphia Fed President Santomero are scheduled to speak today and will likely continue the recent hawkish Fedspeak from policymakers. Traders, however, are beginning to pay closer attention to more inflationary data coming out of the eurozone and some dealers believe this may accelerate the European Central Bank’s eventual monetary tightening. August EMU-12 producer price inflation data today revealed a 0.4% m/m and 4.0% y/y surge, significantly higher than expectations. ECB policymakers will scrutinize these and data to determine if they have a second round effect on consumer prices and wages. Still, most market participants believe the ECB will not begin to tighten until H1 2006. The ECB will convene this week and traders will be alert for any indication of more hawkish rhetoric from President Trichet and others. Other eurozone data released today saw August unemployment print at 8.6%, up from 8.5% in July. Euro offers are cited around the $1.1965/ $1.2030 levels.
The yen fell to fresh multi-month lows vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥114.40 level and was supported around the ¥114.00 figure. Today’s range was limited and some dealers attribute that to reported option-related orders up around the ¥114.50 level. Bank of Japan Policy Board member Haru became the latest official to speak about the eventual unwinding of Japan’s long-standing quantitative easing policy overnight. The possibility is now rising that (the year-on-year change in) the nationwide core consumer price index will come to around zero or start posting a rise by around the year-end with the ongoing economic recovery helping to push Japan out of a decade-long (period of) deflation. If these assumptions are met, the possibility of changing the current policy framework will gradually rise in early 2006.” BoJ policymakers and the government are in the middle of opposing public relations campaigns about the inevitable end of Japan’s unorthodox monetary policy. Finance minister Tanigaki today reiterated he sees deflationary pressures persisting. Data released in Japan overnight saw the September monetary base climb 1.7% y/y, up from August’s 1.1% rate. The Nikkei 225 stock index climbed an impressive 1.58% to close at ¥13,738.84. Dollar bids are cited around the ¥113.60 level. The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥136.45 level and was supported around the ¥135.90 level. The British pound and Swiss franc appreciated vis-à-vis the yen as the crosses tested offers around the ¥201.20 and ¥87.95 levels, respectively. In Chinese news, G20 finance ministers and central bankers will convene in China on 15-16 October.
The British pound reversed course and moved higher vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.7620 level and was supported around the $1.7510 level. Data released in the U.K. today saw mortgage equity withdrawal rise to £8.8 billion in Q2 from an unrevised figure of £6.4 billion in Q1. This represents the highest level since Q3 2004 but is probably not indicative of a significant increase in housing market activity. Other data released today saw the CIPS headline construction index recede to 57.2 from 57.4 in August, the 46th consecutive month of expansion. Cable offers are cited around the $1.7725 level. The euro came off vis-à-vis the British pound as the single currency tested bids around the £0.6770 level.
The Swiss franc was little-changed vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.3035 level and was supported around the CHF 1.2985 level. Data released in Switzerland today saw September CPI up 0.4% m/m and 1.4% y/y. Credit Suisse released some forecasts for the Swiss economy today and now expects GDP growth of 1.4% in 2005 and 1.7% by 2007. The bank also expects inflation to remain under control but expects Swiss National Bank to “try top prevent any build-up of potential inflation that could take effect after 2006.” Dollar bids are cited around the CHF 1.2930 level. The euro and British pound moved higher vis-à-vis the Swiss franc as the crosses tested offers around the CHF 1.5525 and CHF 2.2925 levels, respectively.
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