Tuesday November 22, 2005 - 14:33:28 GMT
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Forex Market Commentary and Analysis (22 November 2005)
The euro came off vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.1685 level after encountering selling pressure around the $1.1740 level. The common currency retreated from yesterday’s highs following comments from European Central Bank President Trichet who suggested the central bank is not necessarily entering a period of extended monetary tightening even through it is nearing its first rate hike in some five years. Today, ECB member Quaden indicated he shares Trichet’s views and added there is no reason to compare the Fed’s and ECB’s monetary policies. ECB member Gonzalez-Paramo even played down Trichet’s comment yesterday that the inevitable rate hike may come as soon as next month’s Governing Council meeting. He added “There is no smoking gun. There is just an identification of the upside risks to prices, which we've talked about repeatedly"There has not been a decision (on interest rates). If the strategy of the council was to make declarations in real time, it wouldn't be a serious institution. What we cannot do is make decisions in real time, even less without a explanation that qualifies the decision." In contrast to the remarks from ECB officials, Chicago Fed President Moskow yesterday intimated the Fed could raise rates above the so-called neutral rate, if required. Many Fed-watchers believe the neutral rate is around 4.50%, about 50bps above current levels. The Federal Open Market Committee’s latest meeting minutes will be released tonight and traders will review them closely to see if there are any clues about the Fed’s current tightening cycle. Data released in the eurozone today saw German GDP increase 0.6% q/q in Q3, consistent with provisional estimates. Traders also moved into dollars late yesterday when it was reported that October U.S. leading economic indicators gained 0.9%, more than expected. The November Richmond Fed index will be released today and traders will pay close attention to it. Yesterday’s announcement that General Motors will lay off 30,000 workers and close twelve plants does not bode well for the U.S. manufacturing industry and the New York, Philadelphia, and Richmond Fed manufacturing surveys may assume more significance. Euro offers are cited around the $1.1765/ 1.1840 levels.
The yen extended recent losses vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥119.50 level and was supported around the ¥118.95 level. The pair’s intraday low was about five pips above the 23.6% retracement of the move from ¥116.80 to ¥119.55, an bullish indicator. Some conspiracy theorists believe the pair may make a run at the ¥120 figure overnight when Japanese financial markets are closed and there is less yen liquidity in the market. Data released in Japan today saw the September tertiary index off 0.7% m/m –the fifth decline in eight months – while the all-industries index was down 0.4%. The most important data are scheduled for release on Friday when the latest consumer price inflation numbers are reported. One of the main criterion for Bank of Japan to begin to unwind its long-standing quantitative easing policy is a return to positive year-on-year inflation. Most BoJ-watchers expect this will happen in 2006, the first step of a return to normalcy in Japanese monetary policy. The Nikkei 225 stock index climbed 0.19% to close at ¥14,708.32, above 100 points below a recent multi-year high. Dollar bids are cited around the ¥118.90/ 50 levels. The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥139.80 level and was supported around the ¥139.45 level. The British pound came off marginally vis-à-vis the yen as sterling tested bids around the ¥203.95 level and was capped around the ¥204.55 level while the Swiss franc gained ground vis-à-vis the yen and tested offers around the ¥90.35 level. The Chinese yuan lost ground vis-à-vis the U.S. dollar as the greenback closed at CNY 8.0839, up from CNY 8.0833. Data released in China overnight saw January – October industrial firms’ profits up 19.4% to CNY 1.11 trillion in the first ten months of 2005. A government survey released overnight reported most Chinese economists do not expect deflation to emerge in 2006.
The British pound continued its descent vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.7080 level after running out of steam around the $1.7175 level. The impetus lower today was a disappointing CBI manufacturing survey that saw November total orders unchanged from October’s level, an indication of weak domestic demand. On a bright note, export orders reached their highest level in 2005. Cable finished lower yesterday after testing offers around the $1.7240 level, forced by euro-negative comments from ECB’s Trichet. Cable offers are cited around the $1.7140/ 90 levels. The euro moved higher vis-à-vis the British pound as the single currency tested offers around the £0.6845 level and was supported around the £0.6825 level. The move higher on the cross followed a report that German utility company E.ON terminated talks about a takeover of the U.K.’s Scottish Power.
The Swiss franc moved lower vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.3240 level and was supported around the CHF 1.3180 level. Technically, today’s low was right around the 50% retracement of the recent pullback from CHF 1.3285 to CHF 1.3080. The Swiss November leading indicator will be released on Friday. Most traders expect Swiss National Bank to tighten monetary policy next month at its year-end monetary policy meeting. Dollar bids are cited around the CHF 1.3205/ 1.3165 levels. The euro and British pound came off vis-à-vis the Swiss franc as the single currency and sterling tested bids around the CHF 1.5460 and CHF 2.2575 levels, respectively.
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