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Thursday February 9, 2006 - 14:57:14 GMT
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Forex Market Commentary and Analysis (9 February 2006)

The euro appreciated modestly vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.1995 level and was supported around the $1.1955 level. Technically, the pair’s intraday high was just below the 38.2% retracement of the move from $1.2590 to $1.1640. Today’s intraday range is again relatively tight again as traders weigh different forces impacting the market. First, market participants are trying to weigh the likelihood of additional monetary tightening from the Federal Reserve. Fed funds futures are pointing to a 90% or so chance the Federal Open Market Committee will tighten policy by +25bps on 28 March. Some dealers are also beginning to price in another – and perhaps final – move on 10 May. A resurgence in second-round wage-price pressures, escalated energy costs, and a tight labour market all contribute to this view. The European Central Bank is also in a tightening mode with many traders pricing in a +25bps move as early as next month. ECB President Trichet has noted the central bank is not necessarily in a tightening mode but persistently high inflation above the ECB’s 2.0% ceiling target has traders on the hawkish side of the fence. Comments from ECB officials Issing, Garganas, and Noyer have made it clear the central bank will raise rates when necessary. Second, many traders are unwilling to assume much risk ahead of tomorrow’s U.S. December trade balance report. A deficit around -US$ 63 billion is expected for December, a marginal improvement from November’s –US$ 64.2 billion rate. Traders will then look forward to the release of Treasury International Capitals flows data next week to confirm the U.S. financed this deficit with international portfolio flows. Third, heightened geopolitical risks involving Iran’s nuclear ambitions and the furor over cartoons depicting Muslim themes have market participants on edge. A biohazard scare on Capitol Hill in Washington, D.C. overnight also added to some dollar bearishness. Data released in the U.S. today saw weekly initial jobless claims rise 4,000 to 277,000. These data have consistently printed below the psychologically-important 300,000 level for weeks, indicative of the lack of much slack in the U.S. labour market. Some dealers noted a report that former Fed Chairman Greenspan talked up the U.S. economy’s strength in a speech yesterday. This is important because Greenspan’s views and policies are still priced in to the Fed’s short-term policy objectives. In eurozone news, the ECB’s February monthly bulletin pledged continued “vigilance” in countering inflation risks and warned the EMU-12 housing market is “becoming overvalued.” Euro offers are cited around the US$ 1.2020/ 60 levels.

¥/ CNY

The yen gained marginal ground vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥118.25 level and was unable to get above the ¥118.80 level. Today’s range was relatively limited, especially after yesterday’s 100-pip move higher from the ¥117.55 level. As expected, Bank of Japan’s Policy Board vote 7-2 overnight to keep its long-standing quantitative easing policy unchanged. BoJ Governor Fukui spoke after the decision was announced and said he “can’t say” if the central bank will shift its policy at the next Policy Board meeting in March. Core consumer price inflation is beginning to print at or above zero per cent and a stabilization of positive year-on-year inflation is the main criterion that needs to take root before BoJ will begin to unwind its unorthodox monetary policy. Most traders, however, do not expect a change in policy before the next fiscal year begins in April. The central bank also maintained an unchanged economic assessment in its February monthly report, noting the economy is evidencing a “steady recovery.” Data released in Japan today saw the January consumer confidence index improve to 49.5 from 46.5 in December, the first improvement in two months. December household spending and machine orders data will be released in Japan overnight. The Nikkei 225 stock index gained 1.03% to close at ¥16,439.67. Dollar bids are cited around the ¥117.40 level. The euro gained marginal ground vis-à-vis the yen as the single currency tested offers around the ¥142.30 level and was supported around the ¥141.70 level. The British pound and Swiss franc weakened vis-à-vis the yen as the crosses tested bids around the ¥206.05 and ¥91.10 levels, respectively. The Chinese yuan appreciated marginally vis-à-vis the U.S. dollar as the greenback closed at the CNY 8.0542 in the over-the-counter market, down from CNY 8.0543, and the greenback closed at CNY 8.0537 in the exchange-traded market, down from CNY 8.0545. There were a couple of newsworthy items in China today. First, it was reported the Chinese government will change the way it calculates consumer price inflation components. Second, the media reported People’s Bank of China will liberalize the rediscount rate to help develop the interest rate market and offer the central bank additional monetary policy tools. The rediscount rate has been at 3.24% since March 2004.

The British pound was little-changed vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.7465 level and was supported around the $1.7380 level. Technically, today’s intraday low was just below the 23.6% retracement of the move from $1.8495 to $1.7045. As expected, Bank of England’s Monetary Policy Committee voted to keep interest rates unchanged for the sixth consecutive month. The repo rate has remained at 4.50% since August 2005 but many dealers believe the central bank may ease policy again within a couple of months. Dovish remarks from MPC’s Nickell and Barker have contributed to the view about an easier policy. Data released in the U.K. today was typically a tale of two economies. On the positive side, NIESR reported the economy expanded at its fastest rate since June 2004 in the three months to January and U.K. new construction orders were up 12% y/y in Q4. On the negative side, the U.K. notched its largest ever trade in goods deficit last year as the December deficit reached a record -£6.06 billion. Other data saw Halifax report that January house prices were off 0.4% m/m. Cable offers are cited around the US$ 1.7530 level. The euro moved higher vis-à-vis the British pound as the single currency tested offers around the £0.6885 level and was supported around the £0.6860 level.


The Swiss franc gained marginal ground vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.2945 level and failed to get above the CHF 1.3000 figure. Technically, today’s intraday low was right around the 61.8% retracement of the move from CHF 1.3195 to CHF 1.2555. Data released in Switzerland today saw the January consumer sentiment index climb +2 index points, up from October’s -15 level. Dollar bids are cited around the CHF 1.2885 level. The euro moved higher vis-à-vis the Swiss franc as the single currency tested offers around the CHF 1.5565 level while the British pound weakened vis-à-vis the Swiss franc and tested bids around the CHF 2.2570 level.


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