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Tuesday February 21, 2006 - 14:56:47 GMT
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Forex Market Commentary and Analysis (21 February 2006)

The euro came off further vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.1895 level and was capped around the $1.1940 level. Technically, today’s intraday high was right around the 23.6% retracement of the move from $1.2190 to $1.1850 while today’s intraday low was right around the 61.8% retracement of the move from $1.1640 to $1.2325. Traders assumed additional long dollar exposure ahead of the release of today’s Federal Open Market Committee meeting minutes from the end of January. Policymakers are expected to have discussed the need to tighten policy at least one more time and are likely to have discussed the seemingly low advance Q4 GDP figure of 1.1% with a strong potential for upward revisions. Currently, the fed funds futures market is pricing in about a 70% chance of another two +25bps moves higher by May and about an 80% chance the Fed will do so by June. Today’s meeting minutes will also be the last in which Fed Chairman Greenspan was an FOMC participant and will be closely scrutinized to learn his views on the economy at the time when he was departing the Fed. The Fed’s monetary policy stance was more neutral in its post-meeting statement as policymakers made it clear they are nearing the end of their tightening cycle. Tomorrow’s January consumer price inflation data and Friday’s durable goods numbers round out the week in data for the U.S. In eurozone news, European Central Bank President Trichet sounded hawkish in testimony yesterday when he said “through the short-term volatility to medium-term trends, our assessment continues to reflect a progressive strengthening of economic activity, supported in particular, by stronger investment, which should be followed by a gradual strengthening of consumption growth.” Trichet also noted inflation may move “somewhat higher” in the short-term and cited downward risks including “high and volatile oil prices and concerns about global imbalances.” Data released in the eurozone today saw the December EMU-12 trade balance notch a deficit of €900 million, unchanged from November’s revised figure and a stark contrast to the €5.5 billion surplus from December 2004. Additionally, the European Commission left its EMU-12 growth and inflation forecasts for 2006 unchanged from its November estimates. Policymakers now see 2006 inflation around 2.2%. The all-important German Ifo sentiment number will be released on Thursday. Euro offers are cited around the $1.1980/ 1.2060 levels.

¥/ CNY

The yen extended recent losses vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥118.95 level and was supported around the ¥118.25 level. Stops were hit above the ¥118.75 level, representing the 76.4% retracement of the move from ¥119.40 to ¥116.75. Economic and Fiscal Policy minister Yosano reiterated the Bank of Japan’s independence overnight, noting the government “must respect the central bank’s position (on monetary policy) as much as possible.” Government officials want BoJ to maintain its ultra-easy monetary policy as long as possible and are calling on the central bank to utilize the GDP deflator as its primary inflation measure. The GDP deflator has been negative for 31 consecutive quarters. BoJ Deputy Governor Muto countered this talk today saying “With regard to an end to the Bank of Japan's quantitative super-loose policy framework, we will carefully monitor economic and price conditions and then, based on our commitment linked to the CPI, will make an appropriate decision.” Core inflation is right around the zero per cent mark in Japan, suggesting the economy is just finally emerging from a long spell of deflation. The central bank, however, has pledged that it will not unwind its long-standing quantitative easing policy until inflation is sustainably above zero per cent. Many traders believe a shift in policy could take place as early as 28 April. The December trade balance and January corporate services price index will be released on Thursday. The Nikkei 225 stock index gained 2.96% to close at ¥15,894.94. Dollar bids are cited around the ¥117.95/ 117.40 levels. The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥141.65 level and was supported around the ¥141.05 level. Technically, today’s intraday low was just below the 61.8% retracement of the move from ¥143.60 to ¥137.10. The British pound and Swiss franc appreciated vis-à-vis the yen as the crosses tested offers around the ¥207.75 and ¥90.85 levels, respectively. The Chinese yuan depreciated vis-à-vis the U.S. dollar today as the greenback closed at CNY 8.0480 in the over-the-counter market, up from CNY 8.0477, while the greenback depreciated in the exchange-traded market, closing at CNY 8.0465, down from CNY 8.0475. The big news involving the yuan involves market chatter that U.S. Treasury officials are considering labeling China a “currency manipulator” when its report to Congress is released in April. Many U.S. politicians believe China has not permitted its yuan currency to appreciate enough and some have threatened protectionist legislation. Data released in China overnight saw January producer price inflation up 3.1% y/y and People’s Bank of China announced it expects PPI growth to decelerate this year. The central bank also reported it will “maintain a prudent monetary policy and maintain the continuity and stability of monetary policy.” Additionally, PBOC noted China “will perfect the management of the floating exchange rate mechanism, let market supply and demand play a fundamental role in the renminbi (yuan) exchange rate and maintain it at a reasonable and balanced level. The efficiency and flexibility of monetary policy is facing challenges from the imbalances of international balance of payments.”

The British pound continued its move higher vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.7475 level and was supported around the $1.7415 level. Chartists are eyeing the $1.7530 level as the pair’s next upside target, representing the 38.2% retracement of the move from $1.7935 to $1.7280. Yesterday’s decent public sector net cash borrowing data have been a boon to sterling. Along the same lines, Ernst & Young ITEM Club last night predicted Chancellor of the Exchequer Brown will achieve the goals this year that will be enumerated in his Budget speech next month. Many economists believe the U.K. will register a budget deficit around £10.6 billion in 2006. Bank of England Monetary Policy Committee meeting minutes from February will be released tomorrow followed by Q4 GDP data on Friday. Cable offers are cited around the $1.7625/ 1.7745 levels. The euro moved lower vis-à-vis the British pound as the single currency tested bids around the £0.6810 level and was capped around the £0.6845 level. Euro bids are seen right around the £0.6800 figure.


The Swiss franc came off marginally vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.3110 level and was supported around the CHF 1.3070 level. Technically, today’s intraday high was just below the 23.6% retracement of the move from CHF 1.2925 to CHF 1.3175. Data released in Switzerland today saw January exports rise a real 7.2% y/y while imports were up 12.3%. The merchandise trade surplus printed at CHF 1.214 billion, up 11.9%. Traders continue to monitor heightened geopolitical tensions in Nigeria and Iran and how they may spur some safe-haven buying of the franc. Militants’ attacks against Nigeria’s oil infrastructure and Iran’s nuclear ambition are at the forefront of traders’ radar screens now. Dollar bids are cited around the CHF 1.3050/ 1.2980 levels. The euro came off vis-à-vis the Swiss franc as the single currency tested bids around the CHF 1.5585 level while the British pound appreciated vis-à-vis the Swiss franc and tested offers around the CHF 2.2885 level.


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