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Wednesday December 14, 2005 - 06:24:20 GMT
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Forex Market Commentary and Analysis (14 December 2005)

The euro advanced higher vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.2040 level and was supported around the $1.1930 level. The common currency spiked higher after the Federal Open Market Committee’s interest rate decision was announced. As expected, the Fed raised the federal funds target rate by 25bps to 4.25%. Policymakers, however, tweaked their policy statement in a very noticeable way, omitting the word “accommodative” to describe the current status of monetary policy. The Fed reported “Despite elevated energy prices and hurricane-related disruptions, the expansion in economic activity appears solid. Core inflation has stayed relatively low in recent months and longer-term inflation expectations remain contained. Nevertheless, possible increases in resource utilization as well as elevated energy prices have the potential to add to inflation pressures. The Committee judges that some further measured policy firming is likely to be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance. In any event, the Committee will respond to changes in economic prospects as needed to foster these objectives.” For several FOMC meetings, the Fed has utilized the same “removal of policy accommodation at a measured pace” to describe its policy stance. The change in language yesterday suggests the Fed may be nearing a level that could be near a “neutral” federal funds rate, as some economists call it. The Fed’s statement, however, does not yield any additional clues about the likely end to its long-standing tightening cycle. Most Fed-watchers believe the Fed will take the federal funds target rate higher by another +25bps at the end of January. The big question on traders’ minds is what the Fed will do at the FOMC meeting on 28 March 2006. The Fed’s statement yesterday clearly leaves enough flexibility for incoming Chairman Bernanke to steer policy towards a direction he favours at the time. In that regard, outgoing Fed Chairman Greenspan was probably very careful to craft a statement that did not handcuff his successor and at the same time left the door open for additional tightening depending on economic circumstances. Many traders believe the 4.75% level is where the Fed will probably end its current tightening cycle, basically amounting to two more additional tightenings. The U.S. October trade deficit data will be released today as will German November CPI data. Euro offers are cited around the US$ 1.2065 level.
¥/ CNY

The yen appreciated sharply vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥118.50 level and was capped around the ¥120.20 level. This represents the pair’s weakest level since 28 November and today’s intraday low is right around the 61.8% retracement of the move from ¥118.20 to ¥121.40. The move lower followed the release of Bank of Japan’s quarterly tankan survey of corporate sentiment. The headline diffusion index for large manufacturers improved to +21 from +19 in September but this was less-than-expected. Preliminary forecasts have the tankan receding back to +19 in the March quarterly report. Other components of the report saw all-industries combined capital expenditures expected to rise 9.1% in the fiscal year to March 2006, above the earlier 6.8% estimate. Albeit the headline tankan survey was weaker-than-expected, it marked the third successive quarterly improvement and traders reacted by paring long dollar positions. The tankan data signify that Japan’s corporate sector continues to expand while profit forecasts and capital spending plans are moving higher. Other data released today saw November corporate bankruptcies fall 4.8% m/m. Today’s tankan report is unlikely to result in a changed monetary policy at Bank of Japan. Most BoJ-watchers believe the central bank will still begin to unwind its long-standing quantitative easing policy some time in 2006. Dollar bids are cited around the ¥118.40 level. The euro moved lower vis-à-vis the yen as the single currency tested bids around the ¥142.55 level and was capped around the ¥143.55 level. The British pound and Swiss franc depreciated vis-à-vis the yen as the crosses tested bids around the ¥210.25 and ¥92.45 levels, respectively. In Chinese news, a government think-tank suggested People’s Bank of China should not rule out a widening of the yuan’s trading band earlier than expected if steps to limit the pressure on the yuan on the appreciate are unsuccessful. PBOC Governor Zhou recently indicated the central bank will not expand the yuan’s trading band vis-à-vis the U.S. dollar anytime soon. The dollar closed at CNY 8.0751 yesterday, it’s weakest showing since PBOC revalued the yuan on 21 July. Data released in China today saw November retail sales climb 12.4% y/y.

The British pound realized gains vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.7760 level and was supported around the $1.7680 level. Cable stopped just short of testing the 50% retracement of the move from $1.8495 to $1.7045. Sterling moved higher after the release of yesterday’s Federal Open Market Committee decision in the U.S. that called into question the end of the Fed’s tightening cycle. In contrast to the Fed, Bank of England’s Monetary Policy Committee is decidedly on hold with interest rates for the foreseeable future. November U.K. labour market data will be released today. Cable offers are cited around the US$ 1.7870 level. The euro moved higher vis-à-vis the British pound as the single currency tested offers around the £0.6780 level and was supported around the £0.6740 level.


The Swiss franc made sharp moves higher vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.2810 level after failing to get above the CHF 1.2940 level. Technically, today’s intraday low is right around the 23.6% retracement of the move from CHF 1.1285 to CHF 1.3285. Swiss National Bank will announce its quarterly interest rate decision tomorrow and is expected to effectively tighten monetary policy by +25bps. Dollar bids are cited around the CHF 1.2760 level. The euro and British pound moved lower vis-à-vis the Swiss franc as the crosses tested bids around the CHF 1.5415 and CHF 2.2730 levels, respectively.


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