Friday December 16, 2005 - 13:06:28 GMT
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Forex Market Commentary and Analysis (16 December 2005)
The euro gained marginal ground vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.2025 level and remained supported around the $1.1935 level. The common currency has been unable to make any headway after it briefly tested the $1.2060 level on Wednesday. The pair failed to make sustained gains after the release of a much stronger-than-expected December Ifo survey that saw German business sentiment print at its highest level ins some 5 ½ years. The headline business climate index rallied to 99.6 from 97.8 in November as German companies became more optimistic about current and future business. Similarly, the December business assessment index and business expectations index also improved. Other data released today saw the EMU-12 harmonized index of consumer prices print at a final 2.3% y/y last month, down from the provisional reading of 2.4% but still above the European Central Bank’s 2.0% ceiling target. The measure fell 0.3% m/m for November, more-than-expected, while annualized energy price increases came in at 10.0%. Also, the core rate of inflation was up 1.4% y/y last month, unchanged from October’s rate, while the ECB’s favoured ex-energy and unprocessed foods component gained an unchanged 1.5% y/y. Traders are still talking about the strong showing in yesterday’s Treasury International Capital flows data for the month of October, the latest evidence that international investors have maintained their strong appetite for U.S. securities and in turn continue to finance the U.S.’s massive trade deficit. Other data released yesterday saw the Philadelphia Fed’s manufacturing diffusion index improve to 12.6 in December from 11.5 in November while the new orders and shipments sub-indices weakened, as did the prices paid sub-index. Euro offers are cited around the $1.2065/ 1.2110 level.
The yen was little-changed vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥116.50 level and was supported around the ¥115.60 level. Today’s intraday low represents the pair’s weakest print since 31 October and technicians are eyeing the ¥115.05 level as a major area of technical support for the pair. Finance minister Tanigaki verbally intervened today, saying he is “closely watching” the “volatile changes in the yen” while BoJ Governor Fukui also intervened. Prime Minister Koizumi added “There is little problem as long as the change is moderate and stable whether it goes up or down. Wasn’t (the yen) higher until a short while ago?” The quarterly Bank of Japan tankan survey that was released on Wednesday promoted strong yen buying even though the headline diffusion index was weaker-than-expected. This reflected stronger profit expectations for Japanese companies in 2006. One school of thought suggests the yen gained ground this week when traders began to unwind yen carry trades, particularly on the Gold/ JPY and New Zealand dollar/ JPY cross rates. The decline in the price of gold to back around the psychologically-important $500 level may have prompted many short-term trades to reduce their gold longs and buy-back yen, the currency they likely funded their buying with. Bank of Japan issued its December economic report overnight and maintained its assessment of the economy for the fourth consecutive month, noting “the economy continues to recover.” BoJ upgraded its view on exports and corporate confidence and predicted “domestic private demand is likely to continued increasing.” Regarding inflation, the central bank added “The year-on-year rate of change in consumer prices, which had been slightly negative thus far, was zero pct in October...and it is projected to turn slightly positive, as supply-demand conditions continue improving gradually.” BoJ’s Policy Board convened over night and voted 7-2 to keep monetary policy unchanged, as expected. The eventual unwinding of the central bank’s long-standing quantitative easing policy remains a very contentious issue between BoJ and the government with the latter hoping to delay a change in policy as long as possible. Regardless of when a change in policy materializes, it will likely take several years for normalcy in interest rates to return. The Nikkei 225 stock index lost 0.53% to close at ¥15,173.07. Dollar bids are cited around the ¥115.05/ ¥113.60 levels. The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥139.95 level and was supported around the ¥138.20 level. The British pound moved higher vis-à-vis the yen as sterling tested offers around the ¥206.35 level while the Swiss franc moved lower vis-à-vis the yen as the cross tested bids around the ¥89.55 level. The Chinese yuan appreciated vis-à-vis the U.S. dollar as the greenback closed at CNY 8.0735, down from CNY 8.0740. A Chinese media report filed overnight reported “The central bank may widen the yuan/dollar trading band from 0.3 pct to three pct, to match the yuan trading band against non-dollar currencies." There has been some speculation this could take place from the beginning of the year. People’s Bank of China advisor Yu Yongding this week said PBOC should expand the yuan’s trading range and reduce the dollar’s weighting in the yuan’s basket of currencies against which it trades.
The British pound moved higher vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.7730 level and remained supported around the $1.7625 level. Technically, today’s intraday low was right around the 23.6% retracement of the move from $1.7045 to $1.7805. There were not many data released in the U.K. today. Instead, traders focused on a Confederation of British Industry survey that predicts the U.K.’s retail sector will reduce its real estate holdings over the next six months for the first time in eleven years, perhaps as a result of less-than-stellar retail sales in 2005. Consumption and final private demand must improve in order for the U.K. economy to gain strength, and dealers are closely monitoring the holiday shopping season in the U.K. In other U.K. news, the two-day European Union Summit will end today and the U.K. is still pressing for a “satisfactory” deal on the EU’s budget for 2007 – 2013. Cable offers are cited around the $1.7770 level. The euro came off marginally vis-à-vis the British pound as the single currency tested bids around the £0.6765 level and was capped around the £0.6785 level.
The Swiss franc lost marginal ground vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.2925 level and was supported around the CHF 1.2835 level. Technically, today’s intraday high is just above the 23.6% retracement of the move from CHF 1.1735 to CHF 1.3285. Swiss National Bank tightened monetary policy by 25bps this week, as expected, and now targets three-month LIBOR around 1.00%, the midpoint of its 0.75% to 1.25% target range. Dollar bids are cited around the CHF 1.2855 level. The euro and British pound moved higher vis-à-vis the Swiss franc as the crosses tested offers around the CHF 1.5465 and 2.2820 levels, respectively.
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