Thursday February 16, 2006 - 15:23:30 GMT
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Forex Market Commentary and Analysis (16 February 2006)
The euro lost marginal ground vis-Ã -vis the U.S. dollar today as the single currency tested bids around the US$ 1.1850 level and failed to get above the $1.1895 level, a relatively tight range. Technically, the common currency was unable to eclipse technical resistance around the 61.8% retracement of the move from $1.1640 to $1.2325. Traders are still talking about new Fed Chairman Bernankeâ€™s inaugural semi-annual testimony before Congress in which the Fed chief yesterday expressed hawkish views about the economy. He indicated he agreed with the Federal Open Market Committeeâ€™s statement late last month that interest rates may need to climb further and suggested robust consumer spending could lead to higher inflation. Bernanke testifies before the Senate Banking Committee today and is expected to remain fairly hawkish and assert his inflation-fighting credentials. Most traders believe the Fed will lift the fed funds target rate by +25bps to 4.75% on 28 March with some also pricing in another +25bps move to 5.00% on 10 May. Data released in the U.S. today was largely dollar-positive. First, it was reported that weekly initial jobless claims climbed +19,000 to 297,000 but remain below the psychologically-important 300,000 level. Second, January housing starts gained a brisk +14.5% to 2.27 million units, the highest level since 1973. This reflects the relatively warm January that most of the U.S. experienced in January and bodes well for Q1 2006 GDP growth in the U.S., as does the increase in building permits. It was also reported that January import prices were up 1.3% m/m and 8.8% y/y, partially reflecting a resurgence in energy prices. This will not go unnoticed by Fed policymakers who want to avoid second-round inflation effects as much as possible. Also, January export prices were up +0.7%. January producer price inflation data and the mid-February University of Michigan consumer sentiment index will be released tomorrow. Despite todayâ€™s decent U.S. data, the greenbackâ€™s upside may be limited and this may reflect concerns about structural imbalances in the U.S. economy. Dealers learned yesterday that the U.S. failed by about US$9.1 billion to attract enough foreign capital investment in December to finance its massive current account deficit. Euro offers are cited around the US$ 1.1935/ 85 levels.
The yen lost marginal ground vis-Ã -vis the U.S. dollar today as the greenback tested offers around the Â¥118.25 level and was supported around the Â¥117.65 level. Technically, the pair stopped short of testing offers around the 61.8% retracement of the move from Â¥121.40 to Â¥113.40. Bank of Japan Policy Board member Nishimura talked about the inevitable unwinding of the central bankâ€™s long-standing quantitative easing policy overnight saying it would not represent a tightening of policy and added it would take quite some time for interest rates to normalize. Some traders believe the central bank could shift its policy as early as next month while other believe it will be after Japanâ€™s new fiscal year begins in April. Fourth quarter gross domestic product data for Japan will be released tonight and market participants are expecting economic growth of about 1.2% q/q and annualized growth of about 5%. A strong GDP number tonight will likely see some short-yen carry trades covered and squeezed. Capital flows data released overnight saw foreign investors as net sellers of Japanese equities and fixed-income securities in the week that ended 10 February. In other Japan-related news, Nippon Life Insurance announced it is shifting or has shifted some Â¥100-200 billion of hedged foreign fixed-income holdings from the dollar to the euro this fiscal year but it is not known if these transactions are already priced in the market. The Nikkei 225 stock index gained 0.70% to close at Â¥16,043.67. Dollar bids are cited around the Â¥117.40/ Â¥116.45 levels. The euro gained marginal ground vis-Ã -vis the yen as the single currency tested offers around the Â¥140.30 level and was supported around the Â¥139.85 level. The British pound and Swiss franc came off vis-Ã -vis the yen as the crosses tested bids around the Â¥204.10 and Â¥89.75 levels, respectively. The Chinese yuan weakened vis-Ã -vis the U.S. dollar today as the greenback closed at the CNY 8.0487 level in over-the-counter trade, up from CNY 8.0479, and at CNY 8.0494 in exchange-traded activity. Data released in China today saw January property prices in major cities rise 5.5% y/y.
The British pound came off vis-Ã -vis the U.S. dollar today as cable tested bids around the US$ 1.7305 level and was unable to move above the $1.7410 level. Technically, todayâ€™s intraday low was just below the 76.4% retracement of the move from $1.7130 to $1.7935. Sterling weakened after it was reported that U.K. January retail sales were off 1.3% m/m and only up 1.3% y/y, the first decline since July 2005. These data are important because they suggest momentum was not maintained in the sector after the holiday shopping period. Cable moved higher yesterday after a less dovish-than-expected quarterly inflation report from Bank of England that prompted many traders to revise their outlook regarding the prospect of another interest rate cut by the central bank. Todayâ€™s retail sales data, however, will be back on tradersâ€™ minds. Data released in the U.K. today saw RICS January house prices rise for the third consecutive month while the government reported Q4 housing starts climbed 4.0% y/y with housing completions up 11%. In fiscal news, Chancellor of the Exchequer Brown will deliver his tenth Budget statement to the House of Commons on 22 March. Cable offers are cited around the US$ 1.7435 level. The euro moved higher vis-Ã -vis the Swiss franc as the single currency tested offers around the Â£0.6855 level and was supported around the Â£0.6825 level.
The Swiss franc depreciated vis-Ã -vis the U.S. dollar today as the greenback tested offers around the CHF 1.3155 level and was supported around the CHF 1.3090 level. Chartists continue to eye the CHF 1.3195/ 1.3235/ 1.3285 levels as the pairâ€™s next upside targets. Some traders are reluctant to short the Swiss franc too much on account of the news that Iran has started to enrich uranium again in defiance of warnings from the global community. Iranâ€™s nuclear ambitions could see the franc benefit from safe-haven flows. Dollar bids are cited around the CHF 1.3045 level. The euro gained marginal ground vis-Ã -vis the Swiss franc as the cross tested offers around the CHF 1.5595 level while the British pound weakened vis-Ã -vis the Swiss franc and tested bids around the CHF 2.2710 level.
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