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Tuesday January 17, 2006 - 14:44:35 GMT
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Forex Market Commentary and Analysis (17 January 2006)

The euro weakened vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.2060 level after encountering offers around the $1.2140 level. Minor stops were hit below the $1.2160 level, representing the 76.4% retracement of the move from $1.2200 to $1.1640. The common currency moved up from intraday lows after the release of a weaker-than-expected January Empire manufacturing index in the U.S. that printed at 20.1, down from December’s level. These data evidence a pullback in manufacturing activity and other manufacturing measures will be closely watched for any similar trends. Other data released in the U.S. today saw December industrial production printed at +0.6%, more-than-expected, while capacity utilization printed at 80.7%, stronger-than-expected. Traders are already talking about tomorrow’s November Treasury International Capital portfolio flows data and December consumer price inflation data. The TICS international portfolio flows data are expected to evidence strong international demand for U.S. assets two months ago and these inflows likely covered that month’s trade deficit. The inflation data are very interesting because many traders are now reevaluating one school of thought that suggests the Federal Reserve only has one more monetary tightening in front of it, namely another +25bps at the Federal Open Market Committee meeting at the end of this month. A hawkish inflation report would signal renewed price pressures and given the current spike in crude and other energy costs, the Fed may stay on the offensive and tighten policy by another 25bps on 28 March. In contrast, the European Central Bank will likely tighten monetary policy by another 25bps in H1 2006, perhaps as early as March. Even though the ECB is clearly in a tightening mode, it will take several meetings and probably more than one year for eurozone interest rates to reach U.S. interest rates levels, if at all during this currency cycle. Hence, it is likely the U.S. dollar will enjoy its yield differential over the euro, albeit a reduced one. In eurozone news, German consumer price inflation were up 2.1% y/y in December, unchanged from the provisional estimate and down from November’s level of 2.3%. This remains the lowest annual rate since August 2005 but the ECB is unlikely to become too comfortable with the pullback in inflation. French finance minister Breton said EMU-12 finance ministers do not see the “necessity” for another rise in interest rates while the German government predicted the average 2006 unemployment rate will be reduced from 2005’s average. Other data due for release in the U.S. this week include the Philadelphia Fed manufacturing survey and the Beige Book. Euro offers are cited around the US$ 1.2110 level.

¥/ CNY

The yen weakened vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥115.40 level and was supported around the ¥114.55 level. Technically, today’s intraday low was right around the 23.6% retracement of the move from ¥118.15 to ¥113.40 and stops were hit above the ¥115.20 level, representing the 38.2% retracement of the same range. Finance minister Tanigaki, back in Tokyo after meeting U.S. Treasury Secretary Snow and Fed Chairman Greenspan last week, said any change in Bank of Japan’s monetary policy “has to be made cautiously…a hasty decision would be risky.” Tanigaki also reasserted BoJ’s independence, an issue that some Liberal Democratic Party mandarins called into question last year. BoJ has reiterated time and time again that it will keep its monetary policy unchanged until important criteria are met including a return to positive year-on-year inflation. Minutes from the most recent BoJ Policy Board meeting will be released on Friday and will be scrutinized to see if there is any change in the stance of policymakers on this issue. Data released in Japan today saw the December consumer confidence index recede to 46.5 in December from 48.2 in November, the first decline in three months, while several sub-indices also worsened. The November leading and coincident indices will be released overnight. The Nikkei 225 stock index gave back 2.84% to close at ¥15,805.95, primarily in response to the government raid of an internet portal. Dollar bids are cited around the ¥114.50/ 113.60 levels. The euro came off marginally vis-à-vis the yen as the single currency tested bids around the ¥139.05 level and was capped around the ¥139.50 level. Technically, today’s intraday low was right around the 50% retracement of the move from ¥140.85 to ¥137.10. The British pound and Swiss franc gained marginal ground vis-à-vis the yen as the crosses tested offers around the ¥203.45 and ¥89.95 levels, respectively. The Chinese yuan weakened vis-à-vis the U.S. dollar as the greenback closed at CNY 8.0673 in over-the-counter trading, up from CNY 8.0668, and closed at CNY 8.0665 in the exchange-traded market, up from CNY 8.0660. A government official today estimated that China’s GDP may have grown a real 9.8% in 2005 along with a 19% surge in industrial production.

The British pound slumped lower vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.7590 level and was capped around the $1.7700 figure. Technically, today’s intraday high and low are respectively right around the 23.6% and 38.2% retracement levels of the move from $1.7905 to $1.7045. Bank of England Governor King spoke last night and said there are more “bumps” in the U.K. economy. King reported that economic growth has improved while inflation has pulled back recently. Many traders believe Bank of England is poised to deliver another monetary tightening in H1 2006, perhaps as early as Q1, if economic growth remains below the trend rate of 0.6% per quarter. Data released in the U.K. today saw the December consumer price index climb 2.0% y/y, the first time it has fallen back to BoE’s target in six months and the lowest print since June 2005. These data may give the MPC more scope to reduce borrowing costs. Labour market data and retail sales data will also be released in the U.K. this week. Cable offers are cited around the US$ 1.7740 level. The euro weakened vis-à-vis the British pound as the single currency tested bids around the £0.6845 level and was capped around the £0.6880 level.


The Swiss franc came off vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.2850 level and was supported around the CHF 1.2760 level. Technically, today’s intraday low represents the 50% retracement of the move from CHF 1.2240 to CHF 1.3285 while the today’s intraday high is right around the 23.6% retracement of the move from CHF 1.1480 to CHF 1.3285. Data released in Switzerland today saw bankruptcies climb 0.4% in 2005 to 10,465, the highest level since 1993. Traders are carefully monitoring events in Nigeria and Iran as they relate to the oil markets. Nigerian militants are threatening to attack pipelines in that country while the Iranian government continues to snub the global community by pursuing a nuclear agenda. It is estimated that these countries account for some 10% to 15% of global daily output of crude and supply disruptions could see crude spike above the US$ 70 level. Heightened geopolitical risks could see safe-haven flows find their way to the Swiss franc. Dollar bids are cited around the CHF 1.2765 level. The euro weakened vis-à-vis the Swiss franc as the single currency tested bids around the CHF 1.5485 level while the British pound escalated vis-à-vis the Swiss franc and tested offers around the CHF 2.2650 level.


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