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Wednesday February 1, 2006 - 15:12:39 GMT
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Forex Market Commentary and Analysis (1 February 2006)

The euro extended losses vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.2075 level after encountering offers around the $1.2160 level. The common currency backed away from intraday highs yesterday after the release of the Federal Open Market Committee’s monetary policy statement following its decision to lift the federal funds target rate by +25bps to 4.50%. The Fed reported “Although recent economic data have been uneven, the expansion in economic activity appears solid. Core inflation has stayed relatively low in recent months and longer-term inflation expectations remain contained. Nevertheless, possible increases in resource utilization as well as elevated energy prices have the potential to add to inflation pressures. The Committee judges that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance. In any event, the Committee will respond to changes in economic prospects as needed to foster these objectives. Many traders bought dollars after reading this statement because many interpreted it as being more hawkish than expected, even though the Fed only reported “further policy firming may be needed.” Many market participants now believe the Fed may lift the federal funds target rate by 25bps to 4.75% at the 28 March FOMC meeting and then end its current tightening cycle. Yesterday’s FOMC meeting also marked Fed Chairman Greenspan’s final meeting – and day in office – as the Fed chief. Incoming Fed Chairman Bernanke’s words and actions will be closely monitored to see if there will be a continuity of Greenspan’s style of governance or a different approach. Notably, with President Bush’s recent nomination of two Fed Governors, Bernanke and Fed Governor Kohn will be the only monetary policy experts on the Board and this has many wondering if Bernanke’s influence at FOMC meetings will increase. Data released in the U.S. today saw December construction spending climb +1.0%, up from +0.5% while the January ISM manufacturing index fell back to 54.8 from 55.6 in December. Friday’s January U.S. non-farm payrolls report will be the big mover in the market at the end of the week. In eurozone news, the EMU-12 manufacturing purchasing managers’ index declined to 53.5 in January from 53.6 in December while the EMU-12 unemployment rate rose to 8.4% in December from 8.3% in November. Additionally, German new orders for machinery and plant climbed 12% y/y. The European Union announced today that it will provide economic forecasts four times per year, up from its current rate of two. The next interim forecasts will be released around 21 February or 22 February. Euro offers are cited around the US$ 1.2140 level.

¥/ CNY

The yen came off vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥117.70 level and was supported around the ¥117.05 level. Technically, today’s intraday low was right around the 76.4% retracement of the move from ¥118.15 to ¥113.40. Chartists are now eyeing the ¥118.15/ 35 levels as the pair’s next hurdles followed by the ¥119.50 levels. The big news in Japan was a media report overnight that the government is considering an upgrade in its February monthly economic assessment. This is noteworthy because Bank of Japan upgraded its assessment of the economy last month and has repeatedly indicated a return to positive core consumer price inflation is the main criterion needed before it begins to unwind its long-standing quantitative easing policy. Until that happens, the yen may be on the defensive as yield hungry Japanese investors seeking higher fixed returns elsewhere. One mitigating factor, however, has been the impressive run-up in the Nikkei 225 stock index that shed 1.02% today to close at ¥16,480.09. Dollar bids are cited around the ¥ 116.50 level. The euro came off vis-à-vis the yen as the single currency tested bids around the ¥142.05 level and was capped around the ¥142.75 level. Technically, today’s intraday low is right around the 76.4% retracement of the move from ¥143.55 to ¥137.10. The British pound appreciated vis-à-vis the yen as sterling tested offers around the ¥209.35 level while the Swiss franc came off vis-à-vis the yen and tested bids around the ¥91.35 level. In Chinese news, the CLSA January purchasing managers’ index rose slightly to 50.2 from 50.1 in December.

The British pound weakened vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.7725 level and was capped around the $1.7810 level. Technically, today’s intraday low was right around the 23.6% retracement of the move from $1.7935 to $1.7665. Data released in the U.K. today saw the January CIPS manufacturing PMI survey increase to 51.7 from 51.3 in December. Also, it was reported that former Federal Reserve Chairman Greenspan will become an honorary adviser to U.K. Chancellor of the Exchequer Brown. Cable offers are cited around the US$ 1.7800 figure. The euro weakened vis-à-vis the British pound as the single currency tested bids around the £0.6805 level and was capped around the £0.6835 level.


The Swiss franc depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.2880 level and remained supported around the CHF 1.2770 level. Technically, today’s intraday high was right around the 50% retracement of the move from CHF 1.3195 to CHF 1.2555. Data released in Switzerland today saw the January purchasing managers’ index rise to 57.6 from 56.3 in December, marking the eleventh consecutive month above to boom-or-bust 50.0 level. The pair did not benefit from any significant safe-haven flows resulting from President Bush’s rhetoric about Iran’s nuclear ambitions in his State of the Union address last night. Dollar bids are cited around the CHF 1.2800 figure. The euro and British pound gained ground vis-à-vis the Swiss franc as the crosses tested offers around the CHF 1.5550 and CHF 2.2845 levels, respectively.


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