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Monday October 31, 2005 - 14:34:22 GMT
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Forex Market Commentary and Analysis (31 October 2005)

The euro was given vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.2005 level after encountering offers around the $1.2085 level. The pair was sharply sold from intraday highs during European dealing as traders continued to position themselves ahead of tomorrow’s Federal Open Market Committee meeting. Most dealers believe the Fed will tighten monetary policy tomorrow by raising the federal funds target rate by +25bps to 4.00%. As is often the case with the Fed, dealers will be more concerned with what the Fed reports in its post-meeting statement. The big question is whether the Fed will retain its long-standing “measured pace” language or whether or not the Fed will signal a forthcoming end in its current tightening cycle. One school of thought suggests outgoing Fed Chairman Greenspan wants to preserve his anti-inflation legacy and will continue to lift borrowing costs so that he does not turn an inflation-prone economy over to incoming Chairman Bernanke. The other big event on the docket this week is the October U.S. non-farm payroll number scheduled for release on Friday. Most economists expect the U.S. economy will have added some 100,000 jobs this month but the wildcard remains the economic impact of hurricanes Katrina and Rita and their effect on the U.S. labour market. Also, dealers want to see if there is an upward adjustment to the September print of -35,000. The likely outcome of the Fed’s meeting tomorrow was cemented by strong income and inflation data that saw personal incomes rise 1.7% last month after declining a revised 0.9% in August. Notably, the headline personal consumption expenditure price index rocketed 0.9% last month, the strongest increase since February 1981. The ex-food and ex-energy core PCE component was up 0.2%, an acceleration from three months of 0.1% gains. Also, consumer spending was up 0.5% last month. In eurozone news, German wholesale sales receded 1.1% m/m in September and improved 1.0% y/y while September retail sales were off 1.6% m/m and 0.7% y/y. European Central Bank policymakers will convene on Thursday and are not expected to raise rates despite recent hawkish talk from officials. ECB President Trichet is quoted most recently in the German media as saying “If we see signs that the inflation gets out of control in Europe, we will act.” Instead of Thursday, most ECB-watchers believe the ECB will tighten policy in December and certainly no later than February. Euro offers are cited around the $1.2035/ 75 levels.

¥/ CNY

The yen moved lower vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥116.25 level and was supported around the ¥115.50 level. Today’s high was the pair’s strongest print since September 2003 and technically opens up the ¥117.70 and ¥118.85 levels as upside targets. Bank of Japan released its semiannual economic outlook today and reported it expects consumer prices to move to zero percent or become positive by the end of 2005. The central bank added it expects an average annual rise in core consumer prices of 0.1% y/y to March 2006, up from -0.1% in the previous forecast. Furthermore, inflation is expected to recent 0.5% y/y in the year to March 2007. These forecasts presage the end to deflation in Japan and the implication is that the BoJ will begin to unwind its long-standing quantitative easing policy; the only question is when it will begin to do so. The report stated policymakers will “gradually” shift policies when they decide to modify the current unorthodox policy. Turning to economic growth, the central bank foresees GDP growth of 2.2% in the fiscal year ending March 2006 and 1.8% in the year to March 2007. The report added “From the second half of fiscal 2005 through fiscal 2006, Japan's economy is likely to experience a sustained period of expansion at a pace slightly above its potential.” BoJ Governor Fukui today said policymakers are “completely open to all options” in ending the central bank’s liquidity target. Data released in Japan today saw September housing starts off 0.2% y/y, the first drop in six months, while orders received by the 50 largest contractors were up 0.6% y/y to September. Also, the government confirmed it did not intervene in the FX markets between 29 September and 27 October. The Nikkei 225 stock index gained 1.95% to close at ¥13,606.50, below the 52-week high of ¥13,783.60. Dollar bids are cited around ¥115.45 level. The euro was little-changed vis-à-vis the yen as the single currency tested bids around the ¥139.35 level and was capped around the ¥139.85 level. The British pound moved higher vis-à-vis the yen as sterling tested offers around the ¥206.60 level while the Swiss franc came off and tested bids around the ¥90.15 level. The Chinese yuan depreciated vis-à-vis the U.S. dollar as the greenback closed at the CNY 8.0845 level, up from CNY 8.0840. A Chinese government advisor today predicted the central bank will revalue the yuan in 2006 or later. This remains a highly contentious issue and some media are reporting the Bush administration is pressuring China to revalue the yuan before President Bush visits China in November.

The British pound could not sustain early gains vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.7720 level and was capped around the $1.7820 level. Technically, today’s high was just above the 38.2% retracement of the move from $1.8495 to $1.7390. A couple of things conspired to push sterling higher earlier in the day. First, it was reported by Bank of England that U.K. mortgage lending picked up in September with mortgage approvals near two-year peaks. It was also reported that September M4 money supply was up 1.4% m/m and 11.2% y/y. Second, it was reported that Spanish telecommunications firm Telefonica SA has agreed to purchase U.K. mobile company O2 Plc for £17.7 billion. These items were tempered by GfK October U.K. consumer confidence data that saw its headline index recede three index points to -8, the lowest level since March 2003. Cable offers are cited around the $1.7815/ 85 levels. The euro came off vis-à-vis the British pound as the single currency tested bids around the £0.6765 level and was capped around the £0.6800 figure.


The Swiss franc depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.2880 level and was supported around the CHF 1.2780 level. Technically, today’s high was right around the 23.6% retracement level of the move from CHF 1.2235 to CHF 1.3070. Swiss October PMI will be released tomorrow followed by October CPI data on Thursday. Dollar bids are cited around the CHF 1.2760 level. The euro and British pound moved higher vis-à-vis the Swiss franc as the crosses tested offers around the CHF 1.5465 and 2.2850 levels, respectively.


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