Tuesday October 25, 2005 - 15:15:38 GMT
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Forex Market Commentary and Analysis (25 October 2005)
The euro scored major gains vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.2110 level and was supported around the $1.1935 level. Stops were triggered above the $1.2035/ 75 levels – important short-term technical levels – during North American dealing. Data released in the U.S. today precipitated the dollar’s plunge. October consumer confidence declined to 85.0 from 87.5 in September while the expectations index plummeted below the 70 level. September existing home sales data were also released and were unchanged m/m at 7.28 million units, better-than-expected. These data evidence a continuation of weak sentiment among U.S. consumers and many attribute this to the recent damage of hurricanes Katrina and Rita. Given the current situation in the southeastern part of the U.S., hurricane Wilma may have a similar effect when the upcoming consumer confidence and consumer sentiment data are released. Some dealers also suggest that the current troubles faced by the Bush administration may also be impacting consumers. The big news during yesterday’s North American session was of course the nomination of former Fed Governor and current White House Council of Economic Advisers Chairman Ben Bernanke to succeed Fed Chairman Greenspan in late January. The markets have been abuzz with speculation about what type of Fed chief the intellectual Bernanke will be. Bernanke has been a proponent of increased Fed transparency – something the Fed has moved around to over the past few years – and is one of the more well-known advocates of inflation-targeting, something Greenspan is markedly against. A U.K. newspaper today ran an interview with Bernanke from a week ago wherein he said U.S. inflation pressures “were likely to remain confined to the energy sector.” The dollar came off on this story under the premise that he will be less inclined to raise rates than Greenspan. Most market participants believe the Federal Open Market Committee will tighten policy by 25bps when policymakers next convene on Tuesday. In eurozone news, the German October Ifo business climate index improved to 98.7 from September’s 96.0 print, a five-year high. It was also announced that German Chancellor-elect Merkel will assume her post on 22 November. The big question regarding the euro on traders’ minds is when the European Central Bank will begin to tighten monetary policy. European interest rate futures markets are currently pricing in a 40% chance that the ECB will raise rates in December. Euro offers are cited around the $1.2125 level.
The yen gained ground vis-à-vis the U.S. dollar today as the greenback receded to the ¥115.10 level after encountering offers around the ¥115.70 level. Technically, the pair moved below the ¥115.25 level, representing the 23.6% retracement of the move from ¥112.95 to ¥115.95. On its crosses, the yen lost ground and this leads many traders to believe the ¥116.00 figure is not safe if the dollar maintains its upward trajectory vis-à-vis other currencies. Options traders cite options-related offers just below the ¥116.00 figure and these positions are likely preventing the dollar from eclipsing the ¥116.00 figure. The major data due this week that are of interest to trades are inflation data that will be released on Friday. Dealers are particularly interested to see if inflation has moved from marginally negative to positive territory. If so, Bank of Japan will be that much closer to unwinding its long-standing quantitative easing policy, a very controversial issue for the government which wants the central bank to delay the inevitable as long as possible. The Nikkei 225 stock index climbed 1.33% to close at ¥13,280.62. Dollar bids are cited around the ¥114.45 level. The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥139.00 figure and was supported around the ¥138.05 level. The British pound and Swiss franc gained ground vis-à-vis the yen as the crosses tested offers around the ¥205.20 and ¥90.00 levels, respectively. The Chinese yuan appreciated vis-à-vis the U.S. dollar as the greenback closed at the CNY 8.0901 level, down from the CNY 8.0916 level. Data released in China today saw January – September fixed –asset investment climb 26.1% y/y to CNY 5.71 trillion while September wholesale prices gained 1.4% y/y. Also, the Chinese media reported that domestic consumption is expected to expand by 11.7% in 2006.
The British pound moved sharply higher vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.7865 level and was supported around the $1.7635 level. Traders are awaiting this afternoon’s testimony from several Bank of England Monetary Policy Committee members including Governor King. Some traders believe the MPC may reduce interest rates again next month while others believe the central bank’s move lower in August is the last move lower the markets will get for some time. Recent U.K. economic data have been mixed with the housing market evidencing some stabilization while other key sectors remain weak. Cable offers are cited around the $1.7885 level. The euro was little-changed vis-à-vis the British pound as the single currency tested bids around the £0.6760 level and was capped around the £0.6785 level.
The Swiss franc made major gains vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.2745 level and was capped around the CHF 1.2940 level. Data released in Switzerland today saw its September trade surplus rise 54.5% to CHF 1.3 billion. Many traders believe the Swiss franc will continue to benefit from increasing risk aversion among investors. One thing that traders are watching is the recent United Nations report that is critical of Syria’s purported involvement of former Lebanese Prime Minister Hariri. The Bush administration is pressing the U.N. Security Council to condemn Syria and military action has not been ruled out. Dollar bids are cited around the CHF 1.2700 figure. The euro and British pound moved higher vis-à-vis the Swiss franc as the crosses tested offers around the CHF 1.5455 and CHF 2.2850 levels, respectively.
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