Monday December 12, 2005 - 15:38:07 GMT
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Forex Market Commentary and Analysis (12 December 2005)
The euro gained solid ground vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.1975 level and was supported around the $1.1775 level. Technically, today’s intraday high was just below the 61.8% retracement of the move from $1.2200 to $1.1640 level. Some market participants are said to be buying euros ahead of tomorrow’s Federal Open Market Committee interest rate decision at which many believe the Fed will remove the “managed pace” language from its statement, possibly signaling an end to its long-standing tightening cycle. Others, however, believe Greenspan will try to persuade his FOMC colleagues to retain the language and let his successor, Ben Bernanke, determine how and when to adjust it. The federal funds target rate is likely to be increased by 25bps to 4.25% tomorrow and then probably again at the end of January. The lingering question on many traders’ minds is what exactly the Fed will do on 28 March. A move higher in interest rates tomorrow would match the European Central Bank’s recent +25bps monetary tightening and largely preserve U.S. assets’ positive yield differential over corresponding eurozone assets. Other events on the horizon for the U.S. today include tomorrow’s retail sales data and inflation data on Thursday. In eurozone news, the Q3 EMU-12 current account deficit narrowed to -€5.1 billion from -€13.3 billion in Q2. The German ZEW survey will be released tomorrow and the Ifo survey will be released on Friday and they will provide the latest snapshot of sentiment in the eurozone’s largest economy. Eurozone offers are cited around the US$ 1.2000/ 1.2060 levels.
The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥119.85 level and was capped around the ¥121.05 level. The pair moved to intraday highs during the Asian session but failed to hold the ¥121.00 figure and was driven lower after stops were hit below the ¥120.40 level during European dealing. Data released in Japan overnight saw the November corporate goods price index remain unchanged month-on-month and climb 1.9% y/y. These data are important because the Japanese economy is still burdened by deflation and a return to positive consumer-level inflation will be needed before Bank of Japan unwinds its long-standing quantitative easing policy. Also, the October current account surplus gained 2.6% y/y to ¥1.377 trillion while capital flows data saw Japanese institutional investors purchase ¥433.2 billion of foreign debt last month following October’s net purchase of ¥3.5 trillion. Real-world capital flows partially explain the yen’s recent weakness. Some dealers, however, believe the yen is ready for a pullback. Data released on Friday saw net short yen futures positions in the IMM reach a record high 71,643 in the week ending 6 December. This high level reflects the negative sentiment surrounding the yen but also suggests the market may be ripe for a pullback because the market may not be able to go higher until weaker longs are pared. Bank of Japan will convene this week and is largely expected to keep monetary policy unchanged. The central bank will also release its quarterly tankan survey of corporate sentiment and an improvement in manufacturing confidence is anticipated, as is an improvement in capital expenditures. The Nikkei 225 stock index gained 2.17% to close at ¥15,738.70. Dollar bids are cited around the ¥119.45/ 05 levels. The euro made major gains vis-à-vis the yen as the single currency tested offers around the ¥143.60 level and was supported around the ¥142.20 level. The British pound and Swiss franc realized gains vis-à-vis the yen as the crosses tested offers around the ¥212.90 and ¥93.10 levels, respectively. The Chinese yuan lost ground vis-à-vis the U.S. dollar as the greenback closed at CNY 8.0770, up from CNY 8.0765. Data released in China today saw the M2 money supply gain 18.3% y/y. People’s Bank of China advisor Yu Yongding reported the central bank has started to tighten monetary policy, just as the market has suspected for a week or so. Interestingly, however, some China-watchers predict the economy will undergo a deflationary period in 2006 thus PBOC’s current tightening actions may simply be smoothing operations. Yu also predicted the Chinese economy will grow about 9% in 2006 and suggested the central bank should expand the yuan’s floating range vos-a-vis the U.S. dollar. Other data released today saw January – November CPI climb 1.8% y/y.
The British pound appreciated sharply vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.7755 level, its strongest showing since 3 November. Technically, today’s intraday high is right around the 50.0% retracement of the move from $1.8495 to $1.7045. Some sterling weakness occurred during the Australasian open after some fuel depots exploded north of London yesterday but this is being called an accident now. Many data were released in the U.K. today. First – and perhaps more importantly – it was reported that retail sales in London grew for the first time since July with like-for-like sales up 2.1% y/y in November. This may bode well for the crucial holiday shopping period. For the January – November period, however, the average monthly retail sales activity in London has fallen 1.7%, a stark contrast to an average of 2.6% growth from 2004. Other data released today saw Rightmove house prices fall 0.8% m/m while the government reported U.K. October annual house price inflation printed at an annualized 2.2%, down from September’s annualized 3.3% level. Additionally, sterling moved higher after the release of stronger-than-expected November producer price inflation that saw input prices gain 1.4% m/m and 12.5% y/y. Producers, however, were generally unable to pass along these costs as manufacturers’ output prices fell 0.2% m/m. A pullback in consumer price inflation will make it easier for Bank of England to keep monetary policy unchanged and potentially lower interest rates if economic growth remains sub-par. Cable offers are cited around the $1.7770/ 1.7885 levels. The euro moved higher vis-à-vis the British pound as the single currency tested offers around the £0.6750 level and was supported around the £0.6720 level.
The Swiss franc moved higher vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.2870 level after encountering resistance around the CHF 1.3065 level. Technically, today’s intraday low was just below the 38.2% retracement level of the move from CHF 1.2240 to CHF 1.3285 level. Swiss National Bank will release its interest rate decision on Thursday and most traders expect the central bank to raise interest rates by 25bps. Swiss September retail sales data will be released tomorrow. Dollar bids are cited around the CHF 1.2760 level. The euro moved higher vis-à-vis the Swiss franc as the single currency tested offers around the CHF 1.5425 level while the British pound came off vis-à-vis the Swiss franc as sterling tested bids around the CHF 2.2885 level.
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