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Thursday November 10, 2005 - 14:09:59 GMT
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FX Market Commentary and Analysis (10 November 2005)



The euro gained marginal ground vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.1790 level and was supported around the $1.1750 level. Many dealers were loath to put on new positions ahead of today’s September U.S. trade balance and University of Michigan consumer sentiment data. The September trade balance printed at –US$ 66.1 billion, worse-than-expected, while the August number was revised to –US$ 59 billion to –US$59.3 billion. The dollar’s fall in the aftermath of these data may be a knee-jerk reaction. When worse-than-expected U.S. October non-farm payrolls data were released last Friday, the dollar was briefly given and then was energized and notched sizable gains. Today’s trade deficit data may not be topical for long because it is likely that Treasury International Capital flows data due next week will confirm the U.S. easily financed its trade deficit with international portfolio flows. St. Louis Fed President Poole spoke yesterday and said talked down the U.S. current account deficit. Poole said “I believe that the current account adjustment will be fairly slow and orderly and that it may not begin for quite some time. There is no inherent reason that such changes would lead to a financial market crisis: as a stable, diversified and growing economy, the United States is not likely to suffer from a sudden lack of confidence by investors. A country with most of its debt denominated in its own currency is in a very different situation from one whose debt is denominated in other currencies.” Other data released today saw weekly initial jobless claims increase +2,000 to 326,000. Another issue on traders’ minds is yesterday’s devastating terrorist attacks in Amman, Jordan wherein three hotels popular with westerners and journalists were bombed. The dollar has suffered at times in the past when targets have been attacked by terrorists. In eurozone news, traders are expressing confusion with the inflation message being peddled by the European Central Bank. ECB President Trichet, who has recently made many hawkish statements, yesterday talked about the lack of second-round price effects from the surge in oil prices. This led many to believe the ECB may not tighten policy until February whereas some market participants foresee a move next month. In contrast, the ECB released its November monthly bulletin today wherein it reported it is focused on headline inflation rather than the largely tame “core” rate. This is confusing because several ECB policymakers remain hawkish and headline inflation printed at 2.5% last month, above September’s 1.5% y/y core rate and the ECB’s 2.0% ceiling target. By and large, the ECB’s monthly report has to be interpreted as establishing the basis for a rate hike sooner rather than later, notwithstanding Trichet’s remarks. Trichet also defused a Financial Times report published yesterday by confirming the ECB already only accepts “A-“ and stronger collateral from member eurozone states. Eurozone data released otday saw France’s September trade deficit recede from August’s level while French October CPI and September industrial output were up 1.9% y/y and 0.2% m/m, respectively. In other eurozone news, German media is reporting the new German government is expected to hike its value-added tax by 3% in 2007. Euro offers are cited around the $1.1840 level.


¥/ CNY

The yen moved lower vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥117.80 level and was supported around the ¥117.50 level, a tight range. Today’s intraday high is right around the 61.8% retracement of the recent pullback from ¥118.35 to ¥116.85. A couple of factors may have contributed to the pair’s tight intraday range. First, a People’s Bank of China official announced the central bank will revalue the yuan in the future, possibly limiting the dollar’s upside. Second, China received warnings that terrorists will strike it when President Bush visits China next week, similar to warnings Japan has received in the past. Data released in Japan today saw September core private-sector machinery orders fall 10.0% m/m, more than was expected and down from August’s +8.2% m/m and 13.4% y/y gains. Core private sector machinery orders were up 2.1% q/q in the three months to September. Capital flows data released overnight saw foreigners as net buyers of ¥655.3 billion in Japanese equities in the week to 4 November and they were net buyers of Japanese debt as well. Japanese investors purchased a net ¥65.2 billion in foreign equities and were purchasers of ¥729.3 billion in foreign debt as well, outstripping foreigners’ purchases of Japanese debt. This is consistent with anecdotal evidence from dealers who indicate significant unhedged yen-selling and dollar-buying trades to purchase foreign securities by Japanese accounts. Japanese Q3 GDP and October consumer price inflation data will be released overnight and traders will closely monitor the latter to see if there is any evidence of positive inflation in Japan. Bank of Japan has telegraphed that it will begin to unwind its long-standing quantitative easing policy once certain conditions are met, the most important of which is positive growth in Japanese inflation. The Nikkei 225 stock index climbed 0.06% to close at ¥14,080.88. Dollar bids are cited around the ¥117.20 level. The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥138.70 level and was supported around the ¥138.20 level. The British pound and Swiss franc gained ground vis-à-vis the yen as the crosses tested offers around the ¥205.90 and ¥90.05 levels, respectively. The Chinese yuan appreciated vis-à-vis the U.S. dollar as the greenback closed at the CNY 8.0847 level, down from CNY 8.0857. Data released in China overnight saw January – October PPI climb 5.3% y/y, mostly on higher fuel and materials prices. People’s Bank of China Vice Governor Xiang Junbo reported China will widen its yuan trading band against the U.S. dollar at an appropriate time. This statement comes a mere week before President Bush visits China. The Bush administration continues to pressure China to revalue its yuan currency.


The British pound moved higher vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.7515 level and remained supported around the $1.7400 figure. Bank of England Monetary Policy Committee’s decision to keep its headline repo rate unchanged at 4.50% gave sterling a lift as there was some residual suspicion monetary policymakers would lower rates, as they did in August. The next major event on the central bank’s radar is the release of next week’s quarterly inflation report. It will be interesting to see if the report downgrades BoE’s forecast for U.K. GDP. Minutes from today’s MPC meeting will be released in a couple of weeks and will evidence any dissent there may have been. CBI today reported business confidence has worsened in every U.K. region for only the second time since 2003. Cable offers are cited around the $1.7560 level. The euro depreciated vis-à-vis the British pound as the single currency tested bids around the £0.6725 level and was capped around the £0.6755 level.

CHF

The Swiss franc gained marginal ground vis-à-vis the U.S. dollar today as the greenback fell to the CHF 1.3045 level after running out of steam around the CHF 1.3115 level. Technically, today’s intraday low is about fifteen pips below the 23.6% retracement of the move from CHF 1.2690 to CHF 1.3170. Dollar bids are cited around the CHF 1.2990 level. The euro came off vis-à-vis the Swiss franc as the single currency tested bids around the CHF 1.5370 level while the British pound moved higher vis-à-vis the Swiss franc and tested offers around the CHF 2.2880 level.

 

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