Wednesday December 21, 2005 - 14:39:34 GMT
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Forex Market Commentary and Analysis (21 December 2005)
The euro moved marginally higher vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.1910 level and was supported around the $1.1855 level. Technically, the common currency stopped just short of testing the 50% retracement of the move from $1.2200 to $1.1640 and its intraday low is right around the 38.2% retracement of the same range. Trading conditions remain thin during this holiday-fueled weak and liquidity could be dented again during the New York session on account of the lingering transit strike in New York City. Final Q3 U.S. GDP data were released today and they evidenced economic growth of 4.1%, down from the most recent revision of 4.3%. These final data were less than expected but reconfirm that the U.S. economy is growing more rapidly than the economies in Europe, Japan, Great Britain, and Switzerland. In eurozone news, European Central Bank sources were quoted as suggesting the ECB will likely raise interest rates by 25bps when the Governing Council convenes in March. On 1 December, the ECB raised interest rates for the first time in several years and most dealers expect the ECB to raise interest rates a couple more times in 2006. Two of Germany’s six leading economic institutes released a report today that predicts the German economy will grow more-than-expected next year, between 1.4% and 1.7%. Stronger domestic demand and increased big ticket items buying ahead of a 2007 increase in VAT are expected to fuel the common currency’s move higher. Euro offers are cited around the $1.1920/ 85 levels.
The yen gained marginal ground vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥116.75 level and was capped around the ¥117.30 level. The pair continues to orbit the ¥117.15 level, the 50% retracement of the move from ¥113.00 to ¥121.40. As expected, Bank of Japan Policy Board members Mizuno and Fukuma jointly suggested a reduction in the ¥30 – 35 trillion current account surplus target for commercial banks at last month’s monetary policy meeting. Most traders, however, expect Bank of Japan to keep its long-standing quantitative easing policy unchanged well into 2006, and for interest rates to take years to return to normalcy thereafter. Data scheduled for release tonight include the November merchandise trade balance and October all-industry and tertiary indices. The Nikkei 225 stock index traded briefly above the psychologically-important ¥16,000 figure for the first time in some five years overnight and closed up 2.02% at ¥15,957.57. Dollar bids are cited around the ¥116.90/ 55 levels. The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥139.40 level and remained supported around the ¥138.80 level. The British pound came off vis-à-vis the yen as sterling tested bids around the ¥204.70 level while the Swiss franc moved higher vis-à-vis the yen and tested offers around the ¥89.80 level. The Chinese yuan depreciated vis-à-vis the U.S. dollar as the greenback closed at CNY 8.0765, up from CNY 8.0740. A government economist today reported a 2% to 5% appreciation of the yuan over one year “won’t have a big impact on China’s trade.” Some dealers expect People’s Bank of China to revalue the yuan again in 2006.
The British pound extended recent losses vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.7480 level after running out of steam around the $1.7590 level. Technically, today’s intraday low is right around the 50% retracement of the move from $1.7905 to $1.7045. Sterling weakened after the release of the Bank of England Monetary Policy Committee meeting minutes from December evidenced an 8-1 vote to keep interest rates unchanged. Stephen Nickell voted for a quarter-point decrease in interest rates, arguing consumer price inflation is likely to undershoot the central bank’s 2.0% target in the medium-term. Many traders believe this sets the stage for another move lower in interest rates by Bank of England, perhaps as early as February. March short sterling interest rate futures moved higher on this news, signaling traders’ belief that rates are moving lower. The current holiday shopping period may well be the deciding factor for policymakers as a weak shopping period would signal fledgling final private demand and, coupled with waning inflationary pressures, be enough to prompt another cut. In contrast to this scenario, however, CBI today reported its volume of sales balance printed at 0% this month, up from -35% on November. This represented the first time since February the measure was not negative and represented the largest monthly improvement in more than ten years. Cable offers are cited around the $1.7560 level. The euro moved higher vis-à-vis the British pound today as the single currency tested offers around the £0.6790 level and was supported around the £0.6755 level.
The Swiss franc lost ground vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.3120 level and was supported around the CHF 1.3030 level. Technically, today’s intraday low was right around the 23.6% retracement of the move from CHF 1.2240 to CHF 1.3285. Today’s intraday low is also right around the 50% retracement of the move from CHF 1.3285 to CHF 1.2770. Dollar bids are cited around the CHF 1.2965 level. The euro moved higher vis-à-vis the Swiss franc as the single currency tested offers around the CHF 1.5545 level while the British pound moved lower vis-à-vis the Swiss franc as sterling tested bids around the CHF 2.2860 level.
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