Thursday December 1, 2005 - 15:15:52 GMT
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Forex Market Commentary and Analysis (1 December 2005)
The euro depreciated vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.1705 level after running into offers around the $1.1805 level. As expected, European Central Bank raised the minimum refinancing bid – its headline short-term interest rate – by 25bps to 2.25%. This change represents the ECB’s first adjustment to monetary policy since June 2003 and was well-telegraphed by ECB policymakers for months. The common currency failed to rally on the news because traders are still focusing on interest rate differentials. While dealers believe the Federal Reserve has at least two more rate hikes in mind, there is less of a chance the ECB will raise rates for an extensive period of time. This would preserve the U.S. dollar’s positive interest rate differential over the euro and attract investment capital. In his post-meeting statement, ECB President Trichet said the central bank will “continue to monitor closely all developments with respect to price stability.” Data released in the U.S. today saw October personal incomes and spending rise +0.4% and +0.2%, as expected, while the core personal consumption expenditure price index gained 0.1% m/m and +1.8% y/y. Also, weekly initial jobless claims were off 17,000 to 320,000 while continuing claims printed around 2.76 million. Other data saw the November ISM manufacturing survey fall to 58.1 from 59.1, consistent with expectations, while the prices paid index came in at 74.0, less-than-expected. Traders will closely monitor tomorrow’s November non-farms payroll report in the U.S. to gauge the health of U.S. labour markets. In euronews news, the November EMU-12 manufacturing PMI survey improved to 52.8 from October’s 52.7 level, its strongest level in fourteen months. Germany’s jobless rate came in at 11.5% last month, down from 11.6% in October, while EMU-12 October unemployment was unchanged at 8.3%. Market participants will also closely monitor the G7 meeting of central bankers and finance ministers in London this weekend. Euro offers are cited around the $1.1765/ 1.1815 levels.
The yen weakened vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥120.25 level, the first time the pair has eclipsed the psychologically-important ¥120.00 figure since August of 2003. Stops were triggered above the ¥120.05 level and some dealers believe the pair was capped below the figure in November by options-related offers that may have been removed when some expiries ran off. The expectation that Bank of Japan will not begin to unwind its long-standing quantitative easing policy anytime soon contribute to the pair’s gains today. Capital flows data released today saw foreign investors as net buyers of ¥134.5 billion in Japanese equities in the week to 25 November, the 23rd out of 24 weeks in which they were net buyers. Foreigners, however, sold ¥101.8 billion in mid- and long-term Japanese debt and purchased a net ¥117.8 billion in short-term debt. Japanese investors purchased a net ¥17.4 billion of foreign equities and ¥28.1 billion in short-term debt but sold ¥16.2 billion in mid- and long-term debt. Dealers have attributed the yen’s weakness to unhedged capital flows over the past couple of months. The Nikkei 225 stock index climbed a sizable 1.74% to close at ¥15,130.50, a fresh 52-week high. Dollar bids are cited around the ¥119.50/ 00 levels. The euro came off vis-à-vis the yen as the single currency tested bids around the ¥140.75 level and was capped around the ¥141.45 level. The British pound moved higher vis-à-vis the yen as sterling tested offers around the ¥207.95 level while the Swiss franc weakened vis-à-vis the yen as the cross tested bids around the ¥91.00 figure. The Chinese yuan appreciated vis-à-vis the U.S. dollar as the greenback closed at CNY 8.0798, down from CNY 8.0804. China’s November PMI survey printed at 49.8, the first time it has been below the “boom-or-bust 50.0” level. A German government source was quoted as saying G7 finance ministers and central bankers will call for enhanced Asian currency flexibility when policymakers convene from tomorrow in London.
The British pound lost ground vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.7260 level and was capped around the $1.7320 level. European names knocked sterling lower to intraday lows after it was reported that the November CIPS manufacturing PMI survey receded to 51.0 from 51.6 in October. These data evidence the continued deceleration of growth and activity in the beleaguered manufacturing sector that accounts for some 17% of U.K. GDP. Separately, CBI reported U.K. retailers may experience their worst holiday sales period since at least 1983. A weak holiday period in terms of consumption and final private demand would put downward pressure on U.K. market interest rates. Outgoing Bank of England Deputy Governor Large spoke today and said it is “too early” to become complacent over U.K. inflation expectations. Cable offers are cited around the $1.7375 level. The euro moved lower vis-à-vis the British pound as the single currency tested bids around the £0.6770 level and was capped around the £0.6820 level.
The Swiss franc extended recent losses vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.3220 level after testing bids around the CHF 1.3120 level. Data released in Switzerland today saw the November PMI survey print at 57.8, a new 2005 high. Other data released today saw Q3 GDP climb 1.0% q/q and 2.3% y/y, exceeding forecasts. Dollar bids are cited around the CHF 1.3160/ 10 levels. The euro moved lower vis-à-vis the Swiss franc as the single currency tested bids around the CHF 1.5460 level while the British pound moved higher vis-à-vis the Swiss franc and tested offers around the CHF 2.2835 level.
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