Tuesday December 27, 2005 - 14:37:44 GMT
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Forex Market Commentary and Analysis (27 December 2005)
The euro weakened vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.1830 level and was capped around the $1.1877 area. Liquidity conditions improved overnight with many dealers returning to their desks in Europe and London after yesterday’s Boxing Day holidays but order flow is definitely reduced and will lessen even further at the end of the week. There were no significant data scheduled for release in the eurozone today and U.S. data due this week include December consumer confidence tomorrow and existing home sales and weekly initial jobless claims on Thursday. One item on the minds of traders now is the inversion of the U.S. yield curve and its significance for both Fed policy and the U.S. economy. Many market participants believe the Fed has one more +25bps monetary tightening left and that the Federal Open Market Committee will raise interest rates in a little bit more than one month. Others believe the Fed will also push short-term rates up again on 28 March before taking a pause from their long-standing tightening cycle. To some, the inverted yield curve may an imminent end to higher U.S. rates while to others, it presages an economic recession. The recession theory has some traders on edge and may make the greenback more vulnerable to weaker economic data. Chartists will also recall that the dollar’s surge higher in 2005 began around 30 December 2004 – nearly a year ago – and it will be interesting to see if the year-end reduces appetite for U.S. assets. Euro offers are cited around the US$ 1.1920 level.
The yen depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥117.30 level and was supported around the ¥116.20 level. Stops were hit above the ¥116.55 and ¥116.80 levels, and the pair managed to climb about fifteen pips above the 50% retracement of the move from ¥112.95 to ¥121.40. Many Japanese economic data were released overnight. Most importantly, it was reported that the November core consumer price index rose 0.1% y/y, the first increase since October 2003. Finance minister Tanigaki, speaking on behalf of a government that does not want Bank of Japan to end its quantitative easing anytime soon, quickly said conditions for ending the long-standing ultra-easy interest rate regime have not yet been met. Other data released today saw the November corporate services price index up 0.2% m/m, the fourth increase in six months, while November wage-earner household spending was up 0.9% y/y. Also, it was reported that the November unemployment rate moved to 4.6% from 4.5% in October and November housing starts expanded 12.6% y/y. On the whole, Japanese economic data have been solid recently and most traders believe the central bank will begin to unwind its quantitative easing policy in 2006. From there, however, it will probably take years for Japanese interest rates to normalize. The yen could appreciate significantly when policy begins to normalize as it will likely reduce the yield spread between Japanese and U.S. assets and create less of an incentive for Japanese investors to move funds abroad. The Nikkei 225 stock index gave back 0.9% overnight to close at ¥15,969.40. Dollar bids are cited around the ¥116.55/ 115.75 levels. The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥139.00 figure and was supported around the ¥137.90 level. The British pound and Swiss franc appreciated vis-à-vis the yen as the crosses tested offers around the ¥203.50 and ¥89.25 levels, respectively. The Chinese yuan appreciated vis-à-vis the U.S. dollar as the greenback closed at CNY 8.0740, down from CNY 8.0755. People’s Bank of China advisor Yu Yongding reported the “direction and range” of exchange rate reform will be determined by both domestic and international factors, adding the yuan will “appreciate gradually within a managed range” in the near-term. Data released in China today saw official foreign exchange reserves at US$ 794.2 billion at the end of November, up from US$ 784.9 billion at the end of October. Many believe China’s foreign reserves will eclipse US$ 1 trillion in 2006.
The British pound drifted marginally lower vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.7295 level after running out of steam around the $1.7380 level. Today’s intraday high was right around the 38.2% retracement of the move from $1.7905 to $1.7050. Sterling’s recent weak streak may continue as traders await economic data that could signal another monetary easing by Bank of England’s Monetary Policy Committee, possibly as soon as February or March. Cable offers are cited around the US$ 1.7480 level. The euro moved lower vis-à-vis the British pound as the single currency tested bids around the £0.6825 level and was capped around the £0.6850 level.
The Swiss franc lost ground vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.3150 level and was supported around the CHF 1.3105 level. Technically, today’s intraday low is just below the 76.4% retracement of the move from CHF 1.3285 to CHF 1.2760. Data released in Switzerland today saw the UBS November consumption indicator climb to -0.71, the third consecutive monthly rise. Dollar bids are cited around the CHF 1.3085 level. The euro came off marginally vis-à-vis the Swiss franc as the single currency tested bids around the CHF 1.5560 level while the British pound moved higher vis-à-vis the Swiss franc as sterling tested offers around the CHF 2.2810 level.
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