Tuesday December 13, 2005 - 14:18:08 GMT
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Forex Market Commentary and Analysis (13 December 2005)
The euro gave back some of yesterday’s gains vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.1905 level after encountering offers around the $1.1970 level. Technically, the common currency stopped just short of testing the 61.8% retracement level of the move from $1.2200 to $1.1640. Many traders are loath to take new positions ahead of the Federal Open Market Committee’s interest rate decision later today. A +25bps increase in the federal funds target rate to 4.25% is anticipated but the most compelling aspect of today’s decision will be today the Fed’s statement. One school of thought suggests the FOMC will retain its “remove policy accommodation at a measured pace” mantra while another school of thought suggests the Fed will alter its policy statement to signal a forthcoming end to its long-term tightening cycle. The former school of thought argues that outgoing Fed Chairman Greenspan will retain the now-customary language and let his successor, Ben Bernanke, decide how and when to signal the Fed’s intentions in the future. An additional +25bps tightening at the FOMC meeting at the end of January will likely take place, rendering the 28 March 2006 FOMC meeting a larger unknown. Speculation about the Fed’s statement and a report that China will actively reduce its U.S. dollar holdings dented the dollar in favour of the euro yesterday. Data released in the U.S. today saw November headline retail sales climb 0.3% m/m and 2.6% y/y, the third successive month of improvements, while the ex-autos component fell 0.3%, the most significant decline in nineteen months. November business inventories data will also be released later. In eurozone news, ZEW’s German economic expectations index climbed sharply to +61.6 this month from November’s +38.7 level. Traders will wait to see if the improved ZEW confidence data precede a strong German Ifo number on Friday. Likewise, the ZEW current economic situation index improved to 55.2 from 44.4. In other German news, the German media is reporting the government there will approve a €14.5 billion stimulus program to grow the economy over the next three years. Other eurozone data released today saw Italian October industrial output fall 2.7% y/y, below expectations, while the French October trade deficit worsened to €2.463 billion. Euro offers are cited around the $1.2000/ 1.2065 levels.
The yen weakened vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥120.45 level and remained supported around the ¥119.65 level. Technically, today’s intraday low was right around the 38.2% retracement of the move from ¥116.80 to ¥121.40 while stops were reached above the ¥120.25 level, around the 23.6% retracement of the same range. Reports continue to surface that Japanese names have been buying gold in massive amounts to hedge against yen weakness. Data released in Japan overnight saw October industrial output climb an unchanged 0.6% m/m while October shipments grew an upwardly revised 1.9% m/m. Also, Japanese companies’ winter bonuses evidenced their sharpest climb in fourteen months, up 3.54%. Bank of Japan will release tonight its quarterly tankan survey of corporate sentiment and an improvement in manufacturing confidence is anticipated, as is an improvement in capital expenditures. The October leading economic index and November machine tools orders will be released tomorrow evening. The Nikkei 225 stock index climbed 0.26% to close at ¥15,778.86. Dollar bids are cited around the ¥119.35/ 10 levels. The euro gained ground vis-à-vis the yen as the single currency tested offers around the ¥143.55 level and was supported around the ¥143.10 level. The British pound and Swiss franc appreciated vis-à-vis the yen as the crosses tested offers around the ¥213.00 and ¥93.05 levels, respectively. The Chinese yuan appreciated vis-à-vis the U.S. dollar today as the greenback closed at CNY 8.0751, down from CNY 8.0770. A government report released today estimates China’s 2005 CPI will be below 1.8% and this is important because People’s Bank of China is currently tightening monetary policy despite concerns there may be some mild deflation in 2006. Data released in China today saw November industrial value-added output climb 16.6% y/y to CNY 659 billion. Another report out of China today estimates that China’s GDP may be underreported by as much as US$ 300 billion. The most significant news out of China today is a statement from a PBOC official that China has appreciable U.S. dollar exposure and needs to coordinate a decreased rate of reserves accumulation with other East Asian economies. This story dramatically impacted the U.S. dollar yesterday. PBOC Governor Zhou was quoted in another media report as indicating pressure for further yuan revaluation is unlikely to materialize next year.
The British pound came off vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.7660 level after running out of steam around the $1.7780 level. Technically, today’s intraday high was right around the 50% retracement of the move from $1.8495 to $1.7045. Data released in the U.K. today saw headline annual CPI print at 2.1% last month, down from 2.3% in October and below expectations. Albeit this print remains above Bank of England’s 2.0% target rate, sterling came off on the premise that Bank of England will have less pressure to raise interest rates. November labour market data will be released in the U.K. tomorrow. Cable offers are cited around the $1.7780/ 1.7880 levels. The euro moved higher vis-à-vis the British pound as the single currency tested offers around the £0.6745 level and as supported around the £0.6725 level.
The Swiss franc came off vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.2960 level and was supported around the CHF 1.2860 level. Stops were reached above the CHF 1.2920 level, representing the 23.6% retracement of the move from and today’s low was right around the 23.6% retracement of the move from CHF 1.1480 to CHF 1.3285. Data released in Switzerland today saw real September retail sales climb 1.6% y/y. Swiss National Bank will release its interest rate decision on Thursday and most traders expect the central bank to raise interest rates by 25bps. Dollar bids are cited around the CHF 1.2885/ 55/ 15 levels. The euro and British pound moved higher vis-à-vis the Swiss franc as the crosses tested offers around the CHF 1.5440 and CHF 2.2925 levels, respectively.
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