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Friday January 27, 2006 - 14:29:53 GMT
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Forex Market Commentary and Analysis (27 January 2006)

The euro edged higher vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.2235 level and was supported around the US$ 1.2160 level. The common currency spiked higher in North American dealing after the release of a shocking advance Q4 U.S. GDP number that saw headline economic growth of a mere 1.1% in the three months ending in December. This compares to a final Q3 reading of 4.1% and surprised many traders and economists who were anticipating stronger economic activity to unfold at the end of last year. Many market participants priced in a stronger number after yesterday’s U.S. durable goods number came in better-than-expected. The weaker-than-expected GDP figure was attributable to lower automobile sales, waning government spending, decreased business investment, and an increase in imports. The dollar was sold off on this number because some dealers believe a deceleration of growth in the U.S. economy puts less pressure on the Federal Reserve to tighten monetary policy. A +25bps move higher in the federal funds target rate next week is a forgone conclusion but today’s data may decrease the likelihood the Federal Open Market Committee will nudge rates higher on 28 March. Monetary hawks, on the other hand, point to the fact that the U.S. is near full employment will the unemployment rate at or below 5.0% and note that energy prices have recently spiked again. The Q4 personal consumption expenditures index gained +2.6% while the core CPI index was up 2.2%. These data indicate inflation is not exactly dormant in the U.S. economy as the long-term average U.S. inflation rate is around 1.7% at present. Thus, the slowdown in U.S. economic activity contrasts with the relatively low level of unemployment and continued price pressures in the U.S. economy. Another unknown related to Fed policy is how incoming Chairman Bernanke will govern the Fed in contrast to outgoing Chairman Greenspan. December new home sales data will be release later today. In eurozone news, the German February GfK consumer climate index printed at 4.6% from a revised 4.0% in January, above consensus. Also, it was reported that the EMU-12 M3 money supply was up 7.3% y/y in December, down from 7.6% y/y in November. The euro was dented earlier today after European Union commissioner Bolkestein question the euro’s long-term prospects on account of significant government borrowings. European Central Bank President member Weber noted in an interview that the central bank is prepared to act as necessary on interest rates. ECB President Trichet spoke at the World Economic Forum in Davos and called for structural reforms in Europe but refused to discuss monetary policy ahead of next week’s ECB Governing Council meeting. Euro offers are cited around the $1.2260/ 75 levels.

¥/ CNY

The yen moved lower vis-à-vis the U.S. dollar today as the greenback tested offers around the US$ 116.90 level and was supported around the $116.10 level. Stops were reached above the ¥116.55 level, representing the 38.2% retracement of the move from ¥108.75 to ¥121.40. The big news in Japan overnight was a move higher in consumer price inflation as the December core CPI figure printed at +0.1% y/y, the first time in some eight years that core inflation has risen in two consecutive months. Japanese officials differed on exactly what these data mean, as expected. Finance minister Tanigaki reiterated that “mild deflation” persists and added both the government and Bank of Japan need to review indicators such as the “gross domestic product deflator and the CPI” in assessing when deflation has ended. His remarks were seconded by Chief Cabinet Secretary Abe. Bank of Japan Governor Fukui has repeatedly indicated a return to positive year-on-year inflation is the main criterion required before the central bank will begin to unwind its long-standing quantitative easing policy. At the very least, today’s data mean Japan is one step closer to shifting its interest rate regime. Other data released today saw December commercial sales rise 4.5% y/y while retail sales were up 1.2%. The Nikkei 225 stock index appreciated 3.58% to close at ¥16,460.68. Dollar bids are cited around the ¥115.80/ 30 levels. The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥142.40 level and was supported around the ¥141.70 level. Today’s intraday high represents the cross’s strongest print since 14 December 2005. The British pound gained ground vis-à-vis the yen as sterling tested offers around the ¥208.00 figure while the Swiss franc was mostly unchanged vis-à-vis the yen, hovering around the ¥91.65 level. The Chinese yuan appreciated vis-à-vis the U.S. dollar as the greenback closed at CNY 8.0616 on the exchange-traded market, down from 8.0620. People’s Bank of China Governor Zhou said the U.S. dollar’s weighting is “much less than 50%” in China’s currency basket that it uses to determine the value of the yuan. Zhou also reported China does not intend to accumulate much more in the way of foreign reserves. China’s official foreign exchange reserves grew by US$ 208.9 billion in 2005 to US$ 818.9 billion.

The British pound scored gains vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.7875 level and was supported around the $1.7755 level. Technically, the pair spiked higher to the 38.2% retracement level of the move from $1.9215 to $1.7045 after the release of weaker-than-expected U.S. inflation data. Also, today’s intraday low was just above the 23.6% retracement of the move from $1.7130 to $1.7935. Data released in the U.K. today saw BBA December mortgage approvals decline to 51,233 to 71,319 in November while NIESR reported the U.K. economy will continue to realize sub-par economic growth in 2006. Cable offers are cited around the US$ 1.7945 level. The euro came off vis-à-vis the British pound as the single currency tested bids around the £0.6835 level and was capped around the £0.6870 level.


The Swiss franc was little-changed vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.2680 level and was capped around the CHF 1.2765 level. Technically, today’s intraday high was right around the 50% retracement level of the move from CHF 1.2240 to CHF 1.3285. Data released in Switzerland today saw the January KOF leading indicator print at a weaker-than-expected 1.22 and December’s tally was downwardly revised. Also, November retail sales data evidenced a +2.2% y/y climb. Dollar bids are cited around the CHF 1.2690 level. The euro and British pound gained ground vis-à-vis the Swiss franc as the crosses tested offers around the CHF 1.5540 and CHF 2.2700 levels, respectively.


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