Monday January 16, 2006 - 16:33:01 GMT
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Forex Market Commentary and Analysis (16 January 2006)
The euro weakened vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.2105 level after encountering offers around the US$ 1.2175 level. Technically, today’s intraday low is around the 50% retracement of the move from $1.2590 to $1.1640. Market participants bought back the euro during North American dealing on Friday after European Central Bank President Trichet used the word “vigilant” to describe the central bank’s commitment to countering inflation. Euro bears sold the common currency on Thursday after Trichet failed to use that term in the European Central Bank’s post-meeting press conference on Thursday. The ECB tightened monetary policy on 1 December by 25bps, lifting the headline refinancing rate to 2.25%. Many traders believe the ECB will tighten monetary policy again as early as March, particularly if inflationary expectations continue to move higher on account of the recent spike in energy prices. EMU-12 inflation data will be released on Wednesday. In contrast, the Federal Open Market Committee is expected to tighten monetary policy again at the end of the month. The big question is whether or not the Fed will lift interest rates when policymakers convene on 28 March. The Fed’s most recent policy statement confirmed that it has entered an increasingly data-dependent mode where upcoming economic data will dictate its policy moves. U.S. data scheduled for release this week include industrial production and capacity utilization data tomorrow, December CPI and TICS portfolio flows on Wednesday, and University of Michigan consumer sentiment data on Friday. Another big item on traders’ minds is today’s meeting between the United States, the United Kingdom, China, Germany, France, and Russia concerning Iran’s nuclear ambitions. Euro offers are cited around the US$ 1.2225 level.
The yen came off vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥115.10 level and was supported around the ¥113.80 level. After a brief sell-off during Australasian dealing, the pair marched higher through European dealing and into the North American session. Data released in Japan today saw the November current account surplus climb 15.1% y/y to ¥1.418 trillion while November industrial output was upwardly revised to 1.5% from 1.4%. Also, the December corporate goods price index climbed 0.2% m/m. These data are important because they show an increase in some intermediate-level pricing power and traders are curious to see if this increased pricing power results in higher retail-level inflation. A return to inflation from more than ten years of deflation is the most important idea on traders’ minds now because it is the main criterion that Bank of Japan has cited is necessary before it begins to unwind its long-standing quantitative easing policy. Capital flows data released in Japan overnight saw foreign investors purchase a net ¥1.38 trillion in Japanese equities last month, the sixth consecutive month that purchases have exceeded ¥1 trillion. These data were down from November’s level of ¥1.64 trillion and overseas investors sold a net ¥231.6 billion in Japanese bonds last month after being net purchasers in November. In contrast, Japanese investors purchased a net ¥148.3 billion in overseas equities last month, down from ¥201.5 billion in November. Japanese investors increased their net purchases of foreign debt to ¥1.404 trillion from ¥433.2 billion in November. The Nikkei 225 stock index was off more than 140 points to ¥16,306.06. Dollar bids are cited around the ¥113.60 level. The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥139.35 level and was supported around the ¥138.45 level. Technically, today’s intraday low is right around the 50% retracement level of the move from ¥133.50 to ¥143.60. The British pound and Swiss franc moved higher vis-à-vis the yen as the crosses tested offers around the ¥203.50 and ¥89.90 levels, respectively. The Chinese yuan appreciated vis-à-vis the U.S. dollar today as the greenback closed at CNY 8.0668, down from CNY 8.0678 on Friday. In the exchange-traded market, the pair closed at CNY 8.0660, down from CNY 8.0683 on Friday. The big news in China today was a report that China’s foreign exchange reserves escalated to a record US$ 818.9 billion in Q4. This news will likely precipitate more of an outcry from critics who maintain China is not doing enough to let the yuan appreciate. This has become an increasingly contentious issue because China’s 2005 trade surplus printed around US$ 101 billion last week. China is likely poised to overtake Japan as the world’s largest official holder of U.S. dollar reserves in 2006. In other Chinese news, the Chinese media quoted a government official as saying China will need to improve its investment returns by focusing on institutional and corporate bonds.
The British pound weakened vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.7640 level after encountering selling pressure around the $1.7795 level. Chartists are eyeing the $1.7600 figure as the next technical target as it represents the 38.2% retracement of the move from $1.8495 to $1.7045. Many data were released in the U.K. today. First, it was reported that output prices fell 0.2% m/m in December, defying expectations of a 0.1% rise, while input prices gained 0.9%, below forecasts for a 1.0% rise. These data are important because they are indicative of less pricing pressure at the intermediate goods level, both pre-production and post-production. Less upward pressure at the retail price level could result in less pressure on the Bank of England Monetary Policy Committee to ease monetary policy early in 2006. Consumer price inflation data will be released tomorrow and many market participants believe they will be benign. Other data released in the U.K. today saw London high-street sales rise for the second consecutive month in December to its highest level in more than three years. These data are important because they suggest the holiday shopping period was brisk in the U.K., an important determinant in MPC’s interest rate policy. Data scheduled for release this week include Wednesday’s labour market data and Friday’s retails sales figures. Additionally, it was reported that U.K. November house prices were up 2.5% y/y, up from October’s 1.8% rise. Cable offers are cited around the US$ 1.7705 level. The euro gained ground vis-à-vis the British pound as the single currency tested offers around the £0.6865 level and was supported around the £0.6830 level.
The Swiss franc came off vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.2805 level and was supported around the CHF 1.2725 level. Technically, today’s intraday high was right below the 23.6% retracement of the move from CHF 1.1285 to CHF 1.3285. Swiss National Bank President Roth was hawkish in his remarks last week wherein he suggested interest rates need to rise further. Traders are closely watching developments with the Iranian nuclear saga, noting the Swiss franc could appreciate if portfolio flows seek the safe-haven status of the Swiss franc. Dollar bids are cited around the CHF 1.2690 level. The euro moved higher vis-à-vis the Swiss franc as the single currency tested offers around the CHF 1.5510 level while the British pound weakened vis-à-vis the Swiss franc and tested bids around the CHF 2.2570 level.
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