Wednesday November 16, 2005 - 15:14:07 GMT
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Forex Market Commentary and Analysis (16 November 2005)
The euro continued its descent vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.1660 level after running out of steam around the $1.1735 level. The common currency plumbed to intraday lows after the release of better-than-expected U.S. economic and investment data. First, it was reported that the headline October consumer price index was up +0.2% while the ex-food and energy “core” rate was up the same amount. On an annualized basis, the core rate was up +2.1% y/y, up from September’s +2.0% pace and above the Fed’s perceived comfort zone. Albeit the Fed puts more stock in the core personal consumption expenditures measure of inflation, today’s data evidence that price pressures are permeating from the producer level to the consumer level. This reinforces the widespread belief the Federal Open Market Committee will tighten monetary policy by 25bps next month followed by another quarter-point hike at the end of January. Other U.S. data released today saw September business inventories climb +0.5% while business sales were up +0.6%. Many traders were surprised by the details of another number that saw September Treasury International Capital portfolio flows print at a record high US$ 101.9 billion, some US$ 25 billion above expectations. Foreigners purchased U.S. corporate debt and equities in droves and easily financed the U.S.’s sizable trade deficit two months ago. In eurozone news, EMU-12 October inflation climbed 0.3% m/m and 2.5% y/y, above the European Central Bank’s 2.0% ceiling target. The dollar is also benefiting from a new school of thought that suggests there is a divergence of opinions on the ECB’s Governing Council as to whether or not higher interest rates are now needed. White House economic adviser Hubbard was quoted today in the German media as saying the U.S. economy will slow to 3.3% growth in 2006 from between 3.5% and 4.0% in 2005. Traders paid close attention to yesterday’s Senate testimony of Ben Bernanke who has been tapped by President Bush to replace Fed Chairman Greenspan when the Fed chief leaves his post in January. Bernanke said he will “focus on long-term price stability” and indicated he will not becoming involved in fiscal debates, unlike Greenspan who regularly commented on taxing and spending issues. Bernanke also said he will “take no precipitate steps in the direction of quantifying the definition of long-run price stability” but reiterated his believe that an inflation target would be a boost to the Fed’s transparency. Euro offers are cited around the $1.1740/ 1.1830 levels.
The yen extended recent losses vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥119.55 level and was supported around the ¥118.80 level. Technically, today’s low represented the 23.6% retracement of the move from ¥116.85 to ¥119.40 and the pair traded at levels not seen since August 2003. Options-related offers below the ¥119.50 level are said to be currently capping the pair’s upside. Traders have been paying close attention to President Bush’s meetings with Prime Minister Koizumi, a close ally. Koizumi and other government officials have recently increased the verbal rhetoric about Bank of Japan and its long-standing quantitative easing policy. Koizumi and others want the central bank to delay the inevitable unwinding of its unorthodox quantitative easing policy. BoJ Governor Fukui seems to have capitulated to a certain extent as he has recently said an end to the policy is not yet on the BoJ’s radar. The Nikkei 225 stock index closed at its highest closing level since May 2001, up 0.56% to close at ¥14,170.87. October machinery tool orders will be released tonight followed by Bank of Japan’s monthly report tomorrow night. Dollar bids are cited around the ¥118.90/ 50 levels. The euro moved lower vis-à-vis the yen as the single currency tested bids around the ¥139.30 level and was capped around the ¥139.80 level. The British pound and Swiss franc came off vis-à-vis the yen as the crosses tested bids around the ¥205.30 and ¥90.00 levels, respectively. The Chinese yuan appreciated vis-à-vis the U.S. dollar as the greenback closed at CNY 8.0835, down from CNY 8.0845. Data released in China overnight saw January – October fixed-asset investment climb 27.6%. Finance minister Jin Renqing reported China’s GDP will reach CNY 15 trillion this year. Dealers will closely be watching Beijing over the next few days as U.S. President Bush meets with Chinese officials. Bush has already said the market should determine the value of the yuan’s exchange rate and said he aspires to have better trade relations with China.
The British pound lost significant ground vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.7160 level after running out of steam around the $1.7370 level. The pair has not traded at these levels since November 2003. Bank of England released its quarterly inflation report today and indicated it expects consumer price inflation to remain above 2.0% in the near term but added the outlook for inflation is “slightly weaker” than in August. BoE also reported wages have remained stable. Today’s quarterly report caused sterling to tumble because many dealers believe it opens the door again for additional monetary easing. BoE’s Monetary Policy Committee lowered interest rates by 25bps in August and the prospects of lower economic growth and possibly contained inflation may leave the door open for a more accommodative monetary policy. BoE Governor King spoke today and said there is no reason to anticipate an appreciation in sterling vis-à-vis the euro. Data released in the U.K. today saw the October claimant count climb 12,100 to 890,100, the ninth consecutive monthly increase. Cable offers are cited around the $1.7240 level. The euro moved higher vis-à-vis the British pound as the single currency tested offers around the £0.6790 level and was supported around the £0.6750 level.
The Swiss franc depreciated sharply vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.3285 level and was supported around the CHF 1.3150 level. Stops were reached above the CHF 1.3250 level and pushed the pair to levels that have not traded since November 2003. Most market participants expect Swiss National Bank to hike interest rates next month. October producer and import prices data will be released on Friday. Dollar bids are cited around the CHF 1.3230/ 1.3190 levels. The euro moved higher vis-à-vis the Swiss franc as the single currency tested offers around the CHF 1.5475 level while the British pound came off and tested bids around the CHF 2.2775 level.
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