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Thursday October 13, 2005 - 14:04:01 GMT
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Forex Market Commentary and Analysis (13 October 2005)

The euro extended recent losses vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.1935 level and was capped around the $1.2040 level. Traders moved into dollars after the release of the U.S. August trade deficit data that came in around expectations at –$59.0 billion from a revised figure of -$57.9 billion in July. The trade deficit could easily widen when September’s data are released next month, however, as those results will include the economic impact from hurricane Katrina. Notably, though, U.S. exports rose 1.6% to a record $108.2 billion but this increase was offset by an increase in the value of U.S. oil imports to a record $17.2 billion in August from $15.3 billion in July. These data also mean the U.S. should have had no problem financing the August trade deficit with international portfolio inflows into the U.S. Treasury International Capital (TIC) data will be released in short order and will likely confirm this fact. The dollar also benefited from a strong September import price index that saw the prices of imported goods escalate 2.3% last month, their highest level in fifteen years. This was much hotter than the 0.9% pace expected by economists and even the ex-oil figure was up a record 1.2%. These data underscore recent comments from Federal Reserve officials about rising price pressures and their determination to maintain vigilance on the inflation front. The Federal Open Market Committee will convene for its penultimate meeting of the year in about three weeks and will have to grappled with a strong headline inflation rate that contrasts with lower core inflation. Other data released today saw weekly initial jobless claims fall 2,000 to 389,000. The growing concern with U.S. price pressures is perhaps best evidenced by the yield spread between ten-year U.S. Treasury notes and German bunds. The spread is now at its highest level in more than five years and is also adding to demand for dollars. Very important data will be released in the U.S. tomorrow including consumer price inflation, retail sales, and the mid-October University of Michigan consumer sentiment index. Fed Governor Olson spoke last night and defended his position at the lone dissenter on the FOMC last month and his vote to not hike rates by +25bps. Olson conceded the Fed’s “number one priority” is containing inflation but added there is still “insufficient data as well as great uncertainty” about the impact of hurricanes Katrina and Rita. In eurozone news, European Central Bank President Trichet reiterated his hawkish comments from last week while ECB member Gonzalez-Paramo suggested Trichet was not necessarily signaling a rate hike and added the ECB would remain vigilant even though it did not see any evidence of second-round price effects. Likewise, ECB’s Garganas spotlighted the “abundance of liquidity” in the eurozone but added “the fact that price risks are high does not justify taking action now.” ECB officials were speaking in tandem with the release of a fairly hawkish October monthly bulletin. Eurozone data released today saw EMU-12 Q2 GDP up 0.3% q/q and +1.1% y/y. German finance minister announced that he will be succeeded by North Rhine Westphalia official peer Steinbrueck. Euro offers are cited around the $1.1970 level.

¥/ CNY

The yen moved to new multi-year lows vis-à-vis the U.S. dollar today as the greenback tackled offers just below the psychologically-important ¥115.00 figure. The pair has not traded at these levels since September 2003 and options traders are said to be protecting the figure with offers. Data released in Japan overnight led to the dollar’s gains as it was reported that Japan’s current account surplus receded in August on account of a narrowing in its trade surplus due to dearer oil. The August current account surplus was lower 15.6% y/y to ¥1.22 trillion, the fifth pullback in eight months. The trade surplus caved in some 69% to ¥233 billion as crude oil imports escalated 49.2% y/y. Japan is a major net importer of oil and energy thus the significant shrinkage in its current account deficit was expected. The implication for economic growth, however, is that consumption and business investment will need to pick up some of the slack in foreign trade. Other data released overnight saw September bank lending come off 1.9% y/y, the 93rd consecutive monthly fall, while the September money supply was up 2.1% y/y. Traders remain alert to any comments from Bank of Japan policymakers or government officials about the eventual unwinding of the central bank’s long-standing quantitative easing policy, a very contentious issue. The Nikkei 225 stock index shed 0.11% to close at ¥13,449.24. Many Japanese data will be released overnight including the September domestic consumer goods price index, September import and export price indices, August industrial production, and August capacity utilization. Dollar bids are cited around the ¥114.25 level. The euro lost ground vis-à-vis the yen as the single currency tested bids around the ¥137.15 level and was capped around the ¥137.70 level. The British pound moved higher vis-à-vis the yen as sterling tested offers around the ¥200.95 level while the Swiss franc moved lower vis-à-vis the yen and tested bids around the ¥88.40 level. The Chinese yuan appreciated marginally vis-à-vis the U.S. dollar as the greenback closed at the CNY 8.0885 level, down from CNY 8.0895. Chinese finance minister Renqing today said China will liberalize the yuan exchange rate regime further but at its own pace and to suit its own interest, pre-empting comments expected over the next few days from U.S. Treasury Secretary Snow. Snow and Fed Chairman Greenspan are attending the G20 meeting of central bankers and finance ministers near Beijing this weekend. Data released in China today saw September M2 money supply growth up 17.9% y/y, above People Bank of China’s 15% growth target.

The British pound moved lower vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.7445 level after encountering resistance around the $1.7535 level. Cable’s intraday low was about 50 pips above yesterday’s multi-month low. The British Chamber of Commerce released an alarming report today that suggests manufacturing conditions worsened substantially in Q3. As a result, BCC indicated it may lower its 2005 GDP forecast to 1.6% from 2.0%. Chancellor of the Exchequer Brown spoke again today and called on the European Union to enact significant economic reforms including structural, budgetary, social, regulatory, and trade changes. New Bank of England Monetary Policy Committee member Walton spoke today and downplayed the move in U.K. inflation above the 2.0% target level. Walton voted for the 25bps monetary easing the central bank effected in August. Many dealers believe the BoE will lower rates again next month. Cable offers are cited around the $1.7490 level. The euro came off vis-à-vis the British pound as the single currency tested bids around the £0.6825 level.


The Swiss franc moved lower vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.3000 figure and was supported around the CHF 1.2860 level. This was the first time the pair tested the psychologically-important CHF 1.3000 figure since 5 October. Stops were triggered above the CHF 1.2955 level, representing the 76.4% retracement of the move from CHF 1.3045 to CHF 1.2670. 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 1.5520 and CHF 2.2710 levels, respectively.


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