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Tuesday January 31, 2006 - 15:09:32 GMT
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Forex Market Commentary and Analysis (31 January 2006)

The euro appreciated vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.2125 level and remained supported around the $1.2075 level. Technically, today’s intraday low and high were right around the 76.4% and 61.8% retracement levels of the move from $1.2005 to $1.2320. Today’s important events include the Federal Open Market Committee meeting – and Chairman Greenspan’s last day at the helm – along with President Bush’s State of the Union address tonight. Most traders believe the FOMC will lift the federal funds target rate by +25bps to 4.50% but the big question is what the Fed will report in its monetary policy statement. Given the tightening U.S. labour market, core personal consumption expenditures inflation at the high end of the Fed’s perceived comfort zone, and advance Q4 GDP growth that evidenced a slowing U.S. economy, the Fed’s job is not an easy one. Some market participants believe Greenspan’s final monetary policy statement will be worded so as to offer incoming Chairman Ben Bernanke sufficient flexibility at his first FOMC meeting as Chairman on 28 March. The fed funds futures market is currently pricing in about an 80% chance that the Fed will tighten monetary policy at that meeting. Regarding Bush’s State of the Union address, the biggest implication for the currency markets will likely be any statements he makes about Iran and North Korea. If Bush is hawkish in his remarks regarding geopolitical threats, the dollar could be pressured and safe-haven currencies such as the Swiss franc and euro could benefit. Data released in the U.S. today saw the Q4 employment cost index rise 0.8%, the largest increase since early 2000 and consistent with expectations. For 2005 as a whole, the employment cost index expanded 3.1%, the lowest rate since 1996’s gain of 2.9% and down from 2004’s level of 3.7%. In eurozone news, German unemployment rose in January as the headline figure topped the five million level for the first time since April 2005 with the unemployment ticking up to 11.3% from 11.2%. On a positive note, EMU-12 economic sentiment printed at 101.8 in January, up from 100.6 in December and its highest level since 2001. Also, it was reported that German December wholesale sales grew 0.8% n/n and 1.2% y/y while December retail sales were off 1.4% m/m and down 1.6% y/y. Euro offers are cited around the US$ 1.2200/ 50 levels.

¥/ CNY

The yen gained ground vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥116.95 level and encountered offers around the ¥117.75 level. Technically, today’s intraday high was right around the 23.6% retracment of the move from ¥114.15 to ¥117.80. Many data were released in Japan overnight. First, the December unemployment rate fell to 4.4% from 4.6% in November, a sign of further tightening in Japanese labour markets and a continuation of the economic recovery there. Second, December wage earner household spending climbed 3.2%, the third consecutive month of gains. Third, December housing starts were off 0.9% y/y and December orders received by Japan’s 50 largest contractors grew 13.2% y/y. Traders await the release of earnings data overnight and not many other data will be released in Japan this week. The big issue on traders’ minds is when Bank of Japan’s Policy Board will begin to unwind the central bank’s long-standing quantitative easing policy. Most dealers believe the move will come in 2006 after the core consumer price inflation rate stabilizes above 0%. The Nikkei 225 stock index closed at a fresh 52-week closing high at ¥16.649.82. Dollar bids are cited around the ¥116.40 level. The euro lost marginal ground vis-à-vis the yen as the single currency tested bids around the ¥141.60 level and was capped around the ¥142.35 level. The ¥142.40/ 45 level has proved to be formidable resistance for the cross over recent trading days. The British pound lost ground vis-à-vis the yen as sterling tested bids around the ¥207.30 level while the Swiss franc moved higher vis-à-vis the yen, testing offers around the ¥91.55 level. In Chinese news, it was announced that Shanghai notched 2005 GDP growth of 11.1%. Chinese financial markets including yuan trading should normalize this week after the current Chinese New Year holiday.

The British pound appreciated vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.7750 level and was supported around the $1.7665 level. Technically, today’s intraday high was right around the 23.6% retracement of the move from $1.7130 to $1.7935. Data released in the U.K. today saw Nationwide January house prices escalate at their fastest pace since July 2004, up 1.4% m/m. Also, Bank of England reported December mortgage lending and mortgage approvals accelerated to levels not seen since the middle of 2004. Moreover, GfK reported U.K. consumer confidence improved dramatically this month to -3 from -9 in December, the highest reading since July 2005. BoE Monetary Policy Committee member Nickell, who has been the lone dissenter in calling for lower interest rates, spoke today and said “inflation is more likely than not to come in below the target for some time, once the oil price effect washes out.” Nickell added “wage inflation has not responded significantly to the recent rise in oil prices” and his overall comments make it seem like he will continue to vote for lower interest rates. Cable offers are cited around the US$ 1.7800 figure. The euro gained marginal ground vis-à-vis the British pound as the single currency tested offers around the £0.6850 level and was supported around the £0.6820 level.


The Swiss franc moved higher vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.2815 level and was capped around the CHF 1.2880 level. Technically, today’s intraday high was right around the 38.2% retracement of the move from CHF 1.2240 to CHF 1.3285. There may be a bias towards a stronger Swiss franc during this week’s machinations at the United Nations. The five permanent members of the United Nations’s Security Council agreed its atomic energy agency should monitor Iran’s nuclear developments. The January Swiss trade balance will be released tomorrow followed by January manufacturing PMI on Thursday. Dollar bids are cited around the CHF 1.2780/ 35 levels. The euro and British pound weakened vis-à-vis the Swiss franc as the crosses tested bids around the CHF 1.5530 and CHF 2.2695 levels, respectively.


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