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Thursday October 27, 2005 - 14:14:20 GMT
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Forex Market Commentary and Analysis (27 October 2005)

The euro appreciated sharply vis--vis the U.S. dollar today as the single currency tested offers around the US$ 1.2170 level and remained supported around the $1.2040 level. Technically, todays high represents the 23.6% retracement of the move from $1.3125 to $1.1865. Several things conspired against the dollar today. First, a U.S. government probe into giant auto-maker General Motors was announced, specifically related to accounting statements and practices. This could evolve into a larger problem for the already-smarting auto industry and be a net drag on U.S. equities, thereby lowering international demand for U.S. assets and dollars. Second, European Central Bank member Liikanen became the latest ECB official to hawkishly reiterate the need for vigilance against inflation. The market is currently pricing in a 60% chance the ECB will tighten policy in December. Albeit the Federal Open Market Committee will assuredly raise interest rates next week, eventually the markets will begin to focus on the amount of tightening the ECB may need to enact relative to the perception the Fed could be nearing the end of its tightening cycle. Third, dealers are closely watching developments in Washington, D.C. to see if any prominent Bush administration officials are indicted in an ongoing investigation involving the CIA. Fourth, data released in the U.S. today was weak as September durable goods orders fell 2.1%, the second decline in the previous three months. This drop was more-than-expected but the August tally was upwardly revised from 3.4% to 3.8%. It was reported that orders for core capital goods equipment were 1.2% lower and ex-defense and ex-transportation durable goods were off 2.1% and 1.0%, respectively. Other U.S. data released today saw weekly initial jobless claims fall 28,000 to 328,000 while continuing claims were up 42,000 to 2.9 million units. Fifth, some traders are said to be reducing their U.S. dollar exposure on account of uncertainty regarding the chairmanship of Fed chairman nominee Bernanke. Some economists see Bernanke as being more dovish than outgoing chairman Greenspan and this perception is generally negative for the dollar. In eurozone news, the new German government is proposing an increase in its value-added tax 1% per annum over the next three years. The government must reduce a burgeoning budget deficit and comply with EU Stability and Growth Pact guidelines. Data released in Germany today saw the October GfK consumer climate index print at 3.1, down from 3.3 in September. The ECB today reported the eurozone registered a current account deficit of 2.9 billion with the U.S. in Q2 while the entire EMU-12 deficit was 13.3 billion. All eyes will be on advance Q3 U.S. GDP data due tomorrow and if it does not match or exceed expectations, it could be a fresh excuse to sell the dollar. Euro offers are cited around the $1.2245 level.


The yen reversed course and notched solid gains vis--vis the U.S. dollar today as the greenback receded to test bids just below the 115.00 figure after establishing a multi-month high around the 116.20 level. Dollar bulls succeeded during the Australasian session in pushing the pair through options-related offers that were said to be lined up below the psychologically-important 116.00 figure. Stops were triggered below the 115.65 level during the retracement and the move was attributable to intraday dollar weakness as opposed to yen strength. MoFs Watanabe verbally intervened overnight saying major currencies appear to be following fundamentals tacit approval for the yens recent weakness. Data released in Japan overnight saw September commercial sales up 1.7% y/y while retail sales were up 0.1%. These data are important because consumption accounts for some 55% of economic output in Japan and should continue to increase as Japan overcomes its long-standing bout with deflation. Many data will be released in Japan tonight including household spending, industrial production, and consumer price inflation. The Nikkei 225 stock index gained 0.16% to close at 13,417.08. Dollar bids are cited around the 114.80/ 45 levels. The euro gained marginal ground vis--vis the yen as the single currency tested offers around the 140.05 level and was supported around the 139.60 level. This is the first time the cross has been above the psychologically-important 140.00 figure since 21 April. The British pound and Swiss franc moved higher vis--vis the yen as the crosses tested offers around the 206.40 and 90.55 levels, respectively. The Chinese yuan appreciated vis--vis the U.S. dollar as the greenback closed at the CNY 8.0862 level, down from CNY 8.0867. The Chinese government reconfirmed it sees 2005 GDP above 9% this year while inflation should come in below 2%. Retail sales are expected to have expanded some 12.8% y/y in 2005 as well.

The British pound rallied hard vis--vis the U.S. dollar today as cable tested offers around the US$ 1.7900 figure and was supported around the $1.7735 level. This is the first time the pair has traded with a $1.79 handle since 23 September and technically, todays high was just above the 50% retracement of the move from $1.8500 to $1.7390. Data released by BBA saw U.K. lending escalate to a fourteen-month high on account of mortgage refinances in September. Sterling benefited from this news because it implies that U.K. consumers withdrew home equity, thereby bolstering retail sales and consumption. U.K. Chancellor of the Exchequer Brown today said European inflation is naggingly high on account of economic reforms. Also on the political front, Prime Minister Blair announced he will seek an EU budget deal in a summit in December. Cable offers are cited around the $1.7945 level. The euro was little-changed vis--vis the British pound as the single currency tested offers around the 0.6805 level and was supported around the 0.6775 level.


The Swiss franc moved higher vis--vis the U.S. dollar today as the greenback tested bids around the CHF 1.2695 level and was capped around the CHF 1.2850 level. Technically, todays low was right around the 23.6% retracement of the move from CHF 1.1480 to CHF 1.3080. The Swiss franc was one of the main drivers in the market today, notching gains on many of its crosses. Traders await comments from Swiss National Bank President Roth today and data scheduled for release tomorrow include October SECO economic forecasts and the October KOF leading indicator. Dollar bids are cited around the CHF 1.2655 level. The euro and British pound came off vis--vis the Swiss franc as the crosses tested bids around the CHF 1.5450 and CHF 2.2725 levels, respectively.


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