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Monday February 6, 2006 - 15:03:09 GMT
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Forex Market Commentary and Analysis (6 February 2006)

The euro slumped vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.1960 level and tested offers around the $1.2045. Technically, the pair’s intraday high was just below the 38.2% retracement of the move from $1.2190 to $1.1690. Traders are still buzzing about Friday’s mixed U.S. employment report that saw a respectably January non-farm payrolls tally and significant upward revisions to the payrolls results of late 2005. Many dealers reacted by upgraded their assessment of Q1 GDP with some economists now calling for as much as 5.0% growth in the January – March period. Some of the estimated gains in Q1 activity will likely result from an upward revision to Q4 GDP from the advance 1.1% figure that underwhelmed traders. Another implication of Friday’s data was an increase in the probability that the Federal Open Market Committee will tighten monetary policy at the 28 March FOMC meeting. Prior to the number, the fed funds futures contract was pricing in between a 75% to 80% chance of a hike in April and that has since increased to about 90%. Some traders are also talking about an increase in the fed funds target rate at the 10 May FOMC meeting on account of the pick-up in average hourly earnings, other measures of wages, and a relatively high core personal consumption expenditures index. Dallas Fed President Fisher today said he “would not be surprised if GDP were revised upward when we take a more definitive look at the fourth quarter.” In eurozone news, German December machinery orders declined 1.6% m/m, below expectations. European Central Bank President Trichet will speak in London today and dealers want to know if he will shed any more light on the possibility of another rate hike by the ECB next month. EMU-12 inflation remains above the central bank’s 2.0% ceiling target but Trichet has been careful to point out that any upcoming tightening in monetary policy does not necessarily mean a tightening cycle is at hand. Euro offers are cited around the US$ 1.2050/ 75 levels.

¥/ CNY

The yen climbed higher vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥118.50 level after failing to get above the ¥118.95 level. Technically, today’s price activity represents an inside bar to Friday’s price activity and the pair’s intraday low was about fifteen pips above the 61.8% retracement of the move from ¥121.40 to ¥113.40. An improvement in Japanese economic data paved the way for a higher yen as it was reported that the index of leading economic indicators rose to 80.0 in December from 54.5 in November while the coincident index rallied to 100.0 from 70.0 in November. The January trade balance and bank lending data will be released tomorrow night followed by the government’s economic assessment on Wednesday. The Japanese media published a report last week suggesting the government will upgrade its assessment of the economy for the first time in several months. This would mean both the government and Bank of Japan have upped their views on the economy. The central bank convenes later this week and is not expected to change monetary policy. The big question involving BoJ is when it will begin to unwind its long-standing quantitative easing policy. A sustained return of positive year-on-year core inflation is the main prerequisite for the central bank to modify its unorthodox policy. December household spending and machine orders data will be released on Friday. The Nikkei 225 stock index climbed 0.53% to close at ¥16,747.76. Dollar bids are cited around the ¥118.05/ 117.40 levels. The euro moved lower vis-à-vis the yen as the single currency tested bids around the ¥142.15 level and was capped around the ¥143.10 level. The British pound and Swiss franc weakened vis-à-vis the yen as the crosses tested bids around the ¥207.90 and ¥91.30 levels, respectively. The Chinese yuan appreciated sharply vis-à-vis the U.S. dollar as the greenback closed at a post-July revaluation high CNY 8.0555 in the exchange-traded market, down from CNY 8.0616. In the over-the-counter market, the pair closed at CNY 8.0575, down from CNY 8.0623. Xinhua reported “it is very possible for the yuan to see an accumulated appreciation of 3.0% in the coming months” and traders calculate that the Chinese currency has appreciated from 2.67% since the 21 July 2005 revaluation. Xinhua also reported “(Alan) Greenspan held the view that the yuan appreciation will help little to (narrow) the US trade deficit, which caused some US politicians to ease up a bit on China; but the appointment of Bernanke has now brought uncertainties.” Data released in China today saw the January Purchasing Manager’s Index backtrack to 52.1.

The British pound sank sharply vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.7505 level and was capped around the $1.7640 level. Stops were reached below the $1.7560 level, representing the 23.6% retracement of the move from $1.9220 to $1.7045. Bank of England’s Monetary Policy Committee will convene on Wednesday and Thursday and is not expected to change monetary policy. MPC’s Barker and Nickell last week were dovish in remarks they made and some dealers believe the MPC may lower interest rates in H1 2006. Many U.K. data will be released this week including January BRC retail sales, December manufacturing and industrial production, and the December visible trade balance. Cable offers are cited around the US$ 1.7605 level. The euro gained ground vis-à-vis the British pound as the single currency tested offers around the £0.6840 level and was supported around the £0.6820 level.


The Swiss franc weakened vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.3005 level and was supported around the CHF 1.2910 level. Today’s high represents the pair’s strongest print since 3 January 2006 and the CHF 1.3045 level represents an upside target for the pair. The pair’s gains were somewhat limited by heightened geopolitical tensions that saw Iran suspend its voluntary compliance with the United Nations’s weapon inspections. Traders fear that some 2.4 million daily barrels of crude oil sales could be disrupted by this latest increase in tensions. The Swiss franc is sometimes used as a “safe-haven” currency and further escalation between Iran and the global community could see more interest in the franc. Crude oil futures are back trading above the US$ 66 handle. Dollar bids are cited around the CHF 1.2950/ 1.2875 levels. The euro and British pound weakened vis-à-vis the Swiss franc as the crosses tested bids around the CHF 1.5545 and CHF 2.2740 levels, respectively.


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