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Friday October 28, 2005 - 14:22:20 GMT
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Forex Market Commentary and Analysis (28 October 2005)

The euro moved lower vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.2095 level after testing offers around the $1.2170 level. Technically, today’s high is right around the 23.6% retracement level of the move from $1.3125 to $1.1865. The dollar received some much-needed good news today when advance Q3 GDP data were released and confirmed the U.S. economy expanded at a stronger-than-expected 3.8% annualized rate, above Q2’s 3.3% rate. Also, core consumer prices gained 1.3% in Q3 – the slowest quarterly increase since Q2 2003. This means the core personal consumption expenditures index has gained 1.9% over the past year, moderately higher than the 1.7% long-term trend growth but down from 2.0% in Q2 and the slowest annual increase since Q1 2004. The Federal Open Market Committee will next deliberate monetary policy on Tuesday and is expected to raise U.S. interest rates by 25bps. Other data released today saw the employment cost index rise 0.8% in Q3, consistent with expectations and just above Q2’s 0.7% level. Additionally, the University of Michigan consumer sentiment index fell to 74.2 in October from 75.4 in early October and 75.4 at the end of September. Notably, this is the lowest level since October 1992 and both the current index and expectations index worsened. The big focus for traders at this time involves the monetary policies of the Federal Reserve and the European Central Bank. Whereas the Fed has delivered consistent, measured monetary tightenings since June 2004 and is inarguably nearing the end of its current tightening cycle, the European Central Bank is about to embark upon a tightening cycle. Many dealers and interest rate traders believe the ECB could begin to tighten policy in December while others see February as being more realistic. In fact, the European futures market is pricing in a rise in the refi rate from the current 2.0% rate to 2.25% by March 2006. ECB policymakers have been decidedly more hawkish in their recent remarks. ECB Chief Economist Issing today said “Since faster monetary growth appears to have been more fundamental in nature since mid-2004 than was the case between 2001 and 2003, the likelihood that strong monetary developments ultimately find their way through to higher prices must be seen as considerably higher.” ECB member Wellink today said the central bank is increasingly concerned with energy prices and added action and not rhetoric may be a required response. ECB President Trichet is scheduled to speak later today. EMU-12 inflation was reported to be around 2.5% this month, down from September’s 2.6% level, a four-year high. EMU-12 M3 money supply growth was 8.5% y/y last month, a scorching number that evidences a further need for monetary contraction. Other data released in the eurozone today saw the October sentiment indicator print at 100.5, down from 98.5. Euro offers are cited around the $1.2245 level.

¥/ CNY

The yen gained marginal ground vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥115.10 level and was capped around the ¥115.50 level. A report that the Bush administration told Chinese officials it wants to see another yuan revaluation ahead the President’s visit to China next month prompted some yen-buying. Many data were released in Japan overnight. First, it was reported that September household spending was off 0.4% y/y while September industrial output climbed 0.2% m/m, below forecast. Second, September core nationwide CPI was off 0.1% y/y while Tokyo-area core CPI was off 0.3%. These data are of course very important because they evidence Japan’s continued plight with deflation. Bank of Japan has repeatedly reiterated that an end to deflation is in the main criterion in unwinding its multi-year quantitative easing policy. Third, the September unemployment rate fell to 4.2% from 4.3%. On the political front, it was announced that Prime Minister Koizumi will reshuffle his cabinet on Monday and it remains to be seen if finance minister Tanigaki and economy minister Takenaka will retain their highly visible posts and portfolios. The yen also scored consistent gains on its crosses overnight. The Nikkei 225 stock index lost 0.53% to close at ¥13,346.54. Dollar bids are cited around the ¥115.10/ 114.80 levels. The euro moved lower vis-à-vis the yen as the single currency tested bids around the ¥139.65 level after encountering offers around the ¥140.20 level. The cross continues to have problems with the ¥140 handle. The British pound and Swiss franc came off vis-à-vis the yen as the crosses tested bids around the ¥205.15 and ¥90.30 levels, respectively. The Chinese yuan appreciated vis-à-vis the U.S. dollar as the greenback closed at the CNY 8.0840 level, down from CNY 8.0862. The Financial Times reported that U.S. Treasury Secretary Snow informed Chinese leaders the Bush administration wants to see another revaluation of China’s yuan before President Bush visits next month. The yuan has appreciated about 0.3% since China revalued its currency on 21 July. Chinese media quoted a People’s Bank of China official in saying China will maintain the yuan at a “rational and balanced level.” A separate report indicated China’s foreign trade growth rate will likely decelerate to 15% in 2006.

The British pound came off vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.7770 level after testing offers around the $1.7855 level. Sterling weakened when the NIESR think-tank predicted the U.K. economy will have grown at its slowest pace in more than a decade in 2005. This means Chancellor of the Exchequer Brown’s growth forecast from his Budget statement earlier this year was exceedingly optimistic and in fact growth may come in around half of what he predicted. In a separate report today, IRS indicated pay aware deals are moving higher, up around 3.1% in Q3. These anecdotal data are importance because Bank of England – like all central banks – wants to make sure inflationary pressures do not have second-round effects by showing up as wage inflation. Cable offers are cited around the $1.7885/ 1.7945 levels. The euro was flat vis-à-vis the British pound as the single currency tested bids around the £0.6800 figure and was capped around the £0.6825 level.


The Swiss franc lost marginal ground vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.2780 level after plumbing lower and testing bids around the CHF 1.2695 level. Data released in Switzerland today included the October KOF economic barometer that rose to 0.81 from September’s 0.75 level. This signifies a probable acceleration in Q4 growth and was above economists’ expectations. Separately, the Swiss government raised its 2005 GDP growth forecast to 1.3% from 0.9%. Dollar bids are cited around the CHF 1.2655 level. The euro and British pound were little-changed vis-à-vis the Swiss franc today as the former tested bids around the CHF 1.5445 level while the latter tested offers around the CHF 2.2740 level.


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