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Monday November 14, 2005 - 15:57:49 GMT
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Forex Market Commentary and Analysis (14 November 2005)



The euro reversed course and moved lower vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.1690 level and was capped around the $1.1770 level. The common currency ran out of steam before attacking the $1.1775 level during Australasian dealing and came within 30 pips of testing last week’s low. A few themes look to dominate dealing this week. First, the U.S. dollar’s positive interest rate differentials over eurozone debt may continue to be the primary focus of dealers. Over the last few months, the correlation between the euro and the spread between one-year U.S. and eurozone debt has exceeded 85%, signifying trades’ preoccupation with yield plays. Second, incoming Fed Chairman Bernanke will appear before the Senate Banking Committee tomorrow and dealers will closely monitor his comments to see if they contain any comments about inflation-targeting. Outgoing Fed Chairman Greenspan spoke about the U.S. dollar and the U.S. current account deficit and concluded the dollar has to correct if the U.S. economy will narrow its massive trade deficit. Third, there have been hawkish comments from European Central Bank policymakers and dovish comments from EMU-12 finance ministers on the interest rate front. Most traders expect the ECB to tighten monetary policy for the first time in a couple of years and the only question is when. Fourth, U.S. inflation data will be released on Wednesday and if forecasts are correct, core retail inflation will have risen – an indication that higher energy prices are feeding through factory gates and impacting other sectors of the U.S. economy. Data such as this will only bolster the argument the Federal Open Market Committee is looking to push the federal funds target rate to at least 4.50%. Other U.S. data scheduled for the week include tomorrow’s retail sales and PPI data along with Thursday’s industrial production and capacity utilization numbers. In eurozone news, political horse-trading has cleared the way for Angela Merkel to become Germany’s next Chancellor but dealers are less-than-optimistic about the likelihood of significant economic and financial reforms being undertaken on her watch. Euro offers are cited around the $1.1740/ 1.1810 levels.



¥/ CNY

The yen extended recent losses vis-à-vis the U.S. dollar today as the greenback climbed to the ¥118.80 level and remained supported around the ¥117.85 level. Today’s intraday high represents the pair’s strongest print since August 2003 and a couple of factors contributed to the move. First, Japanese government officials stepped up their public comments about Bank of Japan and the inevitable unwinding of its long-standing quantitative easing policy. Ruling Liberal Democratic Party policy chief Nakagawa this weekend said the central bank “has no independence” in its policy and called on the BoJ to not change policy at this time. Similarly, Chief Cabinet Secretary Abe said an “all-out mobilization” of policy is required to help the economy overcome deflation. Koizumi himself also said it is premature to end the quantitative easing policy. The dismissal of the central bank’s independence in such a public manner evidences the increasingly hardline attitude of Prime Minister Koizumi’s revamped cabinet. BoJ is likely to being to normalize monetary policy in 2006 after consumer price inflation stabilizes above zero per cent. Data released in Japan overnight saw October department store sales decline 1.5% y/y and it was also reported that Japan’s September current account surplus expanded 6.5% y/y to ¥1.86 trillion, the fourth increase in nine months. Notably, the capital and financial account evidenced a net outflow of ¥1.31 trillion two months ago, wider than the ¥911.3 billion one year ago. MoF reported that Japanese investors purchased some ¥3.5 trillion of foreign debt last month, more than four times their purchase levels of September. Fund outflows are contributing to the yen’s weakness as Japanese investors seek higher global yields. Other data saw Tokyo-area October department store sales recede 1.5% y/y to ¥159.2 billion. The Nikkei 225 stock index lost 0.28% today to close at ¥14,116.04. Dollar bids are cited around the ¥118.20/ 117.40 levels. The euro gained ground vis-à-vis the yen as the single currency tested offers around the ¥139.35 level and was supported around the ¥138.25 level. The British pound and Swiss franc appreciated vis-à-vis the yen as the crosses tested offers around the ¥207.10 and ¥90.50 levels, respectively. The Chinese yuan appreciated vis-à-vis the U.S. dollar as the greenback closed at CNY 8.0831, down from CNY 8.0856. It was reported that January – October actual foreign direct investment was off 2.12% y/y to US$ 48.41 billion while contracted foreign direct investment was up 22.53% during that period. It was also reported that October retail sales gained 12.8% y/y to CNY 584.7 billion while January – October industrial valued-added output was up 16.3%. All eyes are on China this week as U.S. President Bush visits following the APEC meeting. The Bush administration is said to be pressing the Chinese government for another yuan revaluation.


The British pound depreciated vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.7365 level and was capped around the $1.7495 level. The pair failed to move through the $1.7500 figure overnight and quickly came off during European dealing. Data released in the U.K. today evidenced a higher-than-expected increase in input prices while manufacturers’ output prices printed below expectations. These data suggest U.K. businesses are having difficulty passing on price increases to consumers and may be limiting their margins. Bank of England is set to release its quarterly inflation report on Wednesday and it is expected to project slower economic growth with inflation continuing to be above forecast. British media are reporting the report will allude to significant “downside” risks and this will likely keep the prospect of lower interest rates on the minds of Monetary Policy Committee members. Comments from BoE Governor King will be closely monitored to see how bearish he is about inflation prospects and economic growth. The British Chamber of Commerce today reduced its 2005 GDP forecast to 1.6% from 2.0% and BCC’s London Retail Consortium reported sales fell 2.3% y/y in October. Cable offers are cited around the $1.7410/ 1.7470 levels. The euro was well-bid vis-à-vis the British pound as the single currency tested offers around the £0.6745 level and remained supported around the £0.6720 level.

CHF

The Swiss franc came off vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.3170 level and was supported around the CHF 1.3060 level. Today’s intraday high was right around last week’s high and sets the table for a possible attempt at taking out the CHF 1.3200 figure. Swiss October import and producer prices data will be released on Friday. Most traders expect Swiss National Bank will tighten policy in about a month at its year-end news conference. Dollar bids are cited around the CHF 1.3120 level. The euro and British pound moved higher vis-à-vis the Swiss franc as the crosses tested offers around the CHF 1.5410 and CHF 2.2905 levels, respectively.

 

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