Monday December 5, 2005 - 15:21:26 GMT
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Forex Market Commentary and Analysis (5 December 2005)
The euro appreciated vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.1785 level and was supported around the $1.1685 level. The common currency gapped lower about fifteen pips from Friday’s close but soon recovered and gained ground in the European session. Data released in the eurozone today saw the EMU-12 November services PMI print at 55.2, up from 54.9 in October, a sixteen-month high, while EMU-12 October retail sales gained 0.5% m/m and 0.4% y/y. There were no significant fireworks at this weekend’s G7 meeting of central bankers and finance ministers in London. Policymakers urged China to consider more currency flexibility and European Central Bank President Trichet explained why the central bank last week enacted its first monetary tightening in a few years. ECB member Quaden today characterized interest rates as “appropriate for the (economic) recovery, which is still starting.” In contrast, new German finance minister Steinbrueck argued against further rate hikes but added interest rates “are not an obstacle for investment.” Steinbrueck also discussed Trichet’s suggestion that last week’s rate hike is not the beginning of an extended tightening cycle. San Francisco Fed President Yellen spoke extensively on Friday and said the time will cone when the Fed needs to alter its “measured pace” language. Yellen, who becomes a voting member of the Federal Open Market Committee next year, made it abundantly clear that interest rates will continue to move higher. The Fed will next deliberate monetary policy a week from tomorrow and is expected to lift the federal funds rate by 25bps then, at the end of January, and probably on 28 March 2006 as well. Data released in the U.S. today saw the November ISM non-manufacturing recede to 58.5 from 60.0 in October. Euro offers are cited around the $1.1840 level.
The yen continued its descent vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥121.40 level and was supported around the ¥120.80 level. This represents the pair’s strongest print since March 2003 and opens up the ¥122 handle as the pair’s next upside target. Another upside target is the ¥122.35 level, the 61.8% retracement of the move from ¥135.15 to ¥101.65. Bank of Japan Governor Fukui spoke at the G7 meeting in London this weekend and said the central bank will “eventually” change its current monetary stance. Fukui added the year-on-year change in core consumer price inflation will likely turn positive by the end of the current fiscal year. Notably, G7 officials did not publicly discuss the yen’s recent weakness and this suggests Japanese monetary authorities are not bothered by current levels or the speed of the depreciation. Data released in Japan today saw non-financial firms’ capital investment climb 9.6% y/y in the July – September period, the tenth consecutive quarterly expansion. Traders are looking forward to the release of the quarterly tankan survey on 14 December and most expect an improvement among large manufacturers for the third successive quarter. The Nikkei 225 stock index climbed 0.84% to close at ¥15,551.31, a fresh multi-year high. Household spending data will be released tomorrow followed by Q3 GDP and October machinery orders data on Thursday. Dollar bids are cited around the ¥120.15/ 119.40 levels. The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥142.40 level and was supported around the ¥141.60 level. The British pound and Swiss franc gained ground vis-à-vis the yen as the crosses tested offers around the ¥210.45 and ¥92.20 levels, respectively. In Chinese news, the Chinese media reported People’s Bank of China will expand its yuan exchange rate reforms with an aim to achieve capital account convertibility. There are continued media reports that PBOC will widen the yuan’s trading band on 1 January 2006, perhaps by 7.2% vis-à-vis the U.S. dollar. China last week avoided being labeled a currency manipulator by the Bush administration and one school of thought suggests a further revaluation was offered by the Chinese. Another report out of China today suggested China may permit foreign investors to trade in its futures market.
The British pound moved higher vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.7420 level and was supported around the $1.7270 level. Technically, today’s high was right above the 76.4% retracement of the move from $1.7520 to $1.7045. Data released in the I.K. today saw the November CIPS PMI services survey recede to 55.8 from 56.1 in October. Chancellor of the Exchequer Brown issues his annual pre-Budget report today and is expected to concede that his 2005 growth forecast of 3.0% to 3.5% was incorrect and will need to be lessened considerably. Brown is likely to announce the U.K. economy has met its “stability” test. The U.K. currently holds the presidency of the European Union through the end of the month and many members criticized the U.K.’s plan to reduce funding for new member states. Cable offers are cited around the $1.7475 level. The euro gained marginal ground vis-à-vis the British pound as the single currency tested offers around the £0.6775 level and was supported around the £0.6755 level.
The Swiss franc moved higher vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.3100 figure and was capped around the CHF 1.3210 level. Technically, today’s low is right around the 38.2% retracement of the move from CHF 1.3285 to CHF 1.2990. The pair had a difficult time around the CHF 1.3215 level last week, representing the 76.4% retracement of this range, and this seems to be dollar-negative. Most traders expect Swiss National Bank to tighten monetary policy when the central bank meets within the next two weeks. Swiss data due this week include the November unemployment rate on Wednesday. Dollar bids are cited around the CHF 1.3085 level. The euro and British pound came off vis-à-vis the Swiss franc as the crosses tested bids around the CHF 1.5425 and CHF 2.2780 levels, respectively.
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