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Friday October 14, 2005 - 14:19:13 GMT
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Forex Market Commentary and Analysis (14 October 2005)

The euro extended recent losses vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.1975 level and was capped around the $1.2060 level. Technically, today’s high was just above the 50% retracement of the move from $1.1900 to $1.2200 and today’s low is just above the 76.4% retracement of the same range. Data released in the U.S. today saw consumer inflation climb at its fastest pace in more than 25 years last month, rising a stronger-than-expected 1.2%. The jump was precipitated by a record 12% climb in energy prices but the headline number was tempered by a core inflation rate (ex-food and energy) was up a mere +0.1%, less-than-expected. On an annualized basis, CPI was up 4.7% over the previous twelve months while core inflation is up 2.0% y/y, down from August’s 2.1% pace. The big question on traders’ minds is how this will affect Fed policymaking. Insofar as energy goods and services accounted for more than 90% of the increase and core inflation is tame, Fed policymakers will probably not be overly concerned until there is evidence of so-called second round effects with inflation passing through to wages. Kansas City Fed President Hoenig was last night the latest Fed official to reconfirm the Fed’s commitment to fighting inflation. The most likely scenario is for the Fed to tighten policy another +50 to 75bps or so before Fed Chairman Greenspan leaves his post in late January 2006. Other data released in the U.S. today saw the preliminary University of Michigan consumer sentiment index print at 75.4, down from September’s reading of 76.9 and worse-than-expected. Also, it was reported that September retail sales climbed +0.2% while the ex-autos component was up a healthier +1.1%. Additionally, August business inventories climbed +0.4%. In eurozone news, final Italian September CPI was unchanged m/m and up 2.0% y/y. Incoming German finance minister Peer Steinbrueck today said one of the new government’s main priorities is to “get (Germany’s) budgetary problems under control.” Euro offers are cited around the $1.2050 level.

¥/ CNY

The yen retraced most of its intraday losses vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥114.90 level and then came off in North American dealing. The pair remained supported overnight around the ¥114.30 level overnight after briefly trading as high as the ¥115.05/ 10 level yesterday. The war of rhetoric between the Bank of Japan and government continued today with finance minister Tanigaki reporting “mild deflation continues in Japan…(BoJ and the government) need to take steady measures to deal with this problem. The Bank of Japan needs to steer its monetary policy carefully, while fully taking into accounts its implications for market sentiment.” Many traders believe the central bank will begin to unwind its long-standing quantitative easing policy relatively soon, perhaps as early as Q1 2006. Data released in Japan overnight saw August industrial production revised to +1.1% m/m from +1.2%. Also, the September wholesale goods price index was up +0.2% m/m and +1.7% y/y. Capital flows data confirmed foreign investors were net buyers of ¥117.5 billion in Japanese equities in the week to 7 October while Japanese investors were net buyers of ¥1.5 trillion in foreign bonds. On the political front, the upper house of Japan’s parliament approved plans to privatize the postal savings system, a reform that will be enacted from October 2007. The Nikkei 225 stock index lost 0.21% to close at ¥13,420.54. Dollar bids are cited around the ¥114.25/ 113.95 levels. The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥137.90 level and was supported around the ¥137.50 level. The British pound and Swiss franc were little-changed vis-à-vis the yen as the crosses tested bids around the ¥200.65 and ¥88.65 levels, respectively. The Chinese yuan depreciated vis-à-vis the U.S. dollar as the greenback closed at the CNY 8.0896 level, up from CNY 8.0885. China overnight pre-empted remarks expected today and this weekend from U.S. Treasury Secretary Snow about the need to further liberalize China’s foreign exchange regime. Prime Minister Wen Jiabao said China will take a “gradual approach” in reforming the yuan’s exchange rate but said the currency will become more market-oriented. Similarly, finance minister Jin Renqing said “China needs to approach the currency exchange rate from the perspective of China's economic interests first and foremost. We will not listen to someone else's conductor when doing what we need to do. We want to consider our partners and the needs of the world economy. We do not decide our currency rate based on the trade deficit of any single country." Data released in China overnight saw January – September actual foreign direct investment recede 2.11% y/y to US$ 43.25 billion. People’s Bank of China today raised interest rates on one-year U.S. dollar deposits by 0.5% to 2.5% and raised the limit on Hong Kong dollar deposits by 0.5% to 2.375%. China also announced that its foreign reserves rose US$ 58 billion in Q3 to US$ 769 billion and many traders believe China’s holdings of foreign reserves could eclipse US$ 1 trillion next year.

The British pound moved marginally lower vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.7480 level and encountered offers around the $1.7580 level. Traders are still talking about yesterday’s comments from new Bank of England Monetary Policy Committee member Walton who highlighted the higher-than-expected rates of inflation. Walton voted for a monetary easing in August, the month the MPC reduced the repo rate by 25bps. Walton’s concern with inflation may indicate there will not be enough support for a rate cut on the MPC in November. On the flip side of the coin, dealers point to the weak U.K. economic data that have been released lately and note the BoE’s latest quarterly inflation report anticipated an increase in inflation. Cable offers are cited around the $1.7600/ 1.7650 levels. The euro moved marginally lower vis-à-vis the British pound as the single currency tested bids around the £0.6830 level.


The Swiss franc moved slightly lower vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.2945 level and was supported around the CHF 1.2855 level. Data released in Switzerland today saw August core retail sales climb 4.7% y/y. Dollar bids are cited around the CHF 1.2810 level. The euro and British pound moved higher vis-à-vis the Swiss franc as the crosses tested offers around the CHF 1.5515 and 2.2710 levels, respectively.


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