Tuesday January 24, 2006 - 15:45:26 GMT
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Forex Market Commentary and Analysis (24 January 2006)
The euro depreciated vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.2255 level after running out of steam around the $1.2320 level. The common currency’s intraday high today represents the pair’s strongest showing since 14 September 2005. Many traders believe today’s pullback is temporary and that the dollar will continue to be pressured. The most commonly-cited reason for the euro’s ascent to continue is the forthcoming end of the Federal Reserve’s long-standing monetary tightening cycle. Most traders believe the Federal Open Market Committee will lift the federal funds target rate by +25bps to 4.50% next week but traders are less certain about the prospects of the 28 March FOMC meeting. In contrast, futures traders are now pricing in about three rate hikes by the European Central Bank in 2006. Still, many longer-term traders recognize the fact that U.S. interest rates are likely to be higher than eurozone interest rates at the end of the year and wonder how much the euro can really appreciate. Interest rates may not matter much to traders this year if structural concerns reemerge as a dominant theme in the FX markets as they were in 2004. New York Fed President Geithner yesterday repeated a familiar mantra of his about the difficulty in sustaining and financing the U.S.’s massive current account deficit. Fed Chairman-designate Bernanke assumes the reins from outgoing Chairman Greenspan next week and dealers are curious to see if he brings a lot – if any – change to the Fed. Data released in the eurozone today saw EMU-12 industrial orders climb 4.9% m/m and 9.2% y/y, above expectations. France reported its 2005 budget deficit came in right around 3% of GDP, less-than-expected. Dutch finance minister Zalm today suggested Ecofin finance ministers should not comment on the ECB’s monetary policy, a practice of many EMU-12 finance ministers. Euro offers are cited around the US$ 1.2360 level.
The yen gained marginal ground vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥114.30 level after encountering resistance around the ¥114.85 level. Technically, today’s intraday low was right around the 61.8% retracement of the move from ¥113.40 to ¥115.90. Data released in Japan today saw December supermarket sales climb 1.8% y/y, the first rise in 22 months, while December department store sales climbed 0.9% y/y, the fourth consecutive monthly improvement. Other data released overnight saw the November tertiary index climb 0.1% m/m, the second consecutive monthly rise, while the all-industries index was up 0.3%. The Ministry of Finance released another assessment overnight that reports all parts of Japan continued to recover in the three months to December. This follows the MoF’s monthly report last week that provided an unchanged assessment of the economy, and Bank of Japan’s assessment last week that provided an upgraded assessment of the economy. Many data will be released on Friday including December nationwide consumer prices and provisional January consumer price inflation data. These data are important because traders await further indication that Japan is overcoming deflation, meaning Bank of Japan is that much closer to unwinding its long-standing quantitative easing policy. The Nikkei 225 stock index gained 1.88% to close at ¥15,648.89. Dollar bids are cited around the ¥114.00 figure. The euro weakened vis-à-vis the yen as the single currency tested bids around the ¥140.40 level after capping out around the ¥141.05 level. Technically, today’s intraday low is right around the 50% retracement of the move from ¥143.60 to ¥137.10. The British pound gained marginal ground vis-à-vis the yen as sterling tested offers around the ¥204.90 level while the Swiss franc weakened vis-à-vis the yen and tested bids around the ¥90.60 level. The Chinese yuan appreciated vis-à-vis the U.S. dollar today as the greenback closed at CNY 8.0623, down from CNY 8.0633 in over-the-counter trade. In the exchange-traded market, the greenback closed at CNY 8.0614, down from CNY 8.0647. Data released in China today saw industrial output climb 16.4% in 2005 while producer price inflation is estimated to have expanded around 5% last year. Another government report released today predicts China will avert deflation this year even though consumer price inflation will decelerate.
The British pound lost marginal ground vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.7805 level and encountered offers around the $1.7885 level. Technically, today’s intraday high was again right around the 38.2% retracement of the move from $1.9215 to $1.7045. Data released in the U.K. todat saw CBI order books recede to levels not seen since last summer. About 42% of firms surveyed in the CBI’s quarterly survey reported lower-than-normal order books with only 14% reporting higher orders books, a net balance of -28% - the weakest since August. On a positive note, the export balance and output balance sub-indices improved. In other U.K. news, it is being reported that the Ecofin warned the U.K. that it needs to reduce its budget deficit below 3% of GDP by March 2007. Bank of England Monetary Policy Committee member Lomax today suggested a deeper dialogue between countries on key financial and economic issues and called for developed countries to avoid protectionism. Cable offer are cited around the US$ 1.7945 level. The euro weakened vis-à-vis the British pound as the single currency tested bids around the £0.6865 level and was capped around the £0.6890 level.
The Swiss franc weakened vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.2630 level and was supported around the CHF 1.2555 level. Technically, today’s intraday high was right around the 23.6% retracement of the move from CHF 1.2885 to CHF 1.2555. Dealers await the January KOF leading indicator data to be released on Friday. Dollar bids are cited around the CHF 1.2520 level. The euro and British pound scored gains vis-à-vis the Swiss franc as the crosses tested offers around the CHF 1.5495 and CHF 2.2545 levels, respectively.
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