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Wednesday February 22, 2006 - 16:17:17 GMT
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Forex Market Commentary and Analysis (22 February 2006)

The euro extended recent losses vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.1860 level after encountering offers around the $1.1930 level. Technically, today’s intraday low was right at the 23.6% retracement of the move from $1.2590 to $1.1640. Traders have been focusing on a couple of key themes. First, U.S. January consumer price inflation data were released today and they said the headline measure increase +0.7% while the ex-food and energy “core” rate was up +0.2%. On an annualized bases, consumer prices have appreciated 4.0%, the most significant twelve-month increase since January 2005. In contrast, there has been a 3.6% increase in average weekly earnings since January 2005 and this means wages are not keeping pace with inflation. On a year-on-year basis, core consumer prices were up 2.1%, down from December’s 2.2% pace. Second, minutes from the Federal Open Market Committee’s 31 January policy meeting were released yesterday and they clearly indicated policymakers foresee additional monetary tightening. Fed officials noted policy is “close to where it needed to be” but traders interpreted the minutes as an indication that rates could move higher when the FOMC meets on 28 March and 10 May. Some Fed officials saw core inflation and inflation expectations as being “somewhat higher than was desirable over the long run” while all FOMC members saw policy increasingly dependent on economic developments. Fed Chairman Bernanke has since testified and was relatively hawkish in his remarks. The Fed has forecasted core inflation will escalate 2.0% in 2006 and about 1.75% to 2.0% n 2007. The minutes also revealed the Fed may tweak the way it delivers its post-meeting interest rate decision and announcement. January durable goods orders will be released in the U.S. on Friday. In eurozone news, EMU-12 new industrial orders were up +2.5% m/m and +7.1% y/y in December and it was reported that German GDP was unchanged at +0.9% y/y in Q4 2005. It was also reported the EMU-12’s current account deficit receded to €5.3 billion in December from €9.5 billion in November, meaning the eurozone notched a €29.0 billion deficit for 2005 after 2004’s €43.5 billion surplus. Euro offers are cited around the US$ 1.1935/ 85 levels.

¥/ CNY

The yen gained marginal ground vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥118.30 level and was capped around the ¥118.85 level. Technically, today’s intraday low was just below the 23.6% retracement of the move from ¥108.75 to ¥121.40. The big news in Japan today was the government’s upgrade of the economy for the first time since August 2005. The government noted the economy is “recovering” and cited exports and industrial output was key areas of improvement. Bank of Japan and the government remain at odds over when the former’s long-standing quantitative easing monetary policy should be shifted and cannot agree on what measure of inflation should be utilized to determine when core consumer inflation has steadied above zero per cent. The Japanese media reported trade between Japan and China expanded 12.7% y/y in 2005 to US$ 189.38 billion. Tonight’s December trade data and January corporate services price index will be closely watched by traders. The Nikkei 225 stock index shed 0.71% to close at ¥15,781.78. Dollar bids are cited around the ¥117.95/ 10 levels. The euro weakened vis-à-vis the yen as the single currency tested bids around the ¥140.65 level and was capped around the ¥141.60 level. The British pound and Swiss franc depreciated vis-à-vis the yen as the crosses tested bids around the ¥206.00 and ¥90.10 levels, respectively. The Chinese yuan depreciated vis-à-vis the U.S. dollar as the greenback closed at CNY 8.0475, up from CNY 8.0465 in exchange-traded activity. Data released in China today saw January consumer price inflation up 1.9% y/y, above expectations.

The British pound came off vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.7375 level after running into resistance around the $1.7465 level. Technically, today’s intraday low was just below the 23.6% retracement of the move from $1.8495 to $1.7045. Sterling’s moves were somewhat surprising today on account of news released in the U.K. today. The CBI’s February order books improved to their best levels in eleven months, evidence the U.K. manufacturing sector could be recovering. The February balance of -18 compares to January’s -28 level. Also, Bank of England Monetary Policy Committee meeting minutes from February were released today and they evidence an 8-to-1 vote to keep the refi rate unchanged at 4.50%. As expected, Stephen Nickell voted for a +25bps decline in rates and the markets were expecting at least one other policymaker to join him. Short sterling futures plummeted following the release of the minutes. Cable offers are cited around the US$ 1.7485 level. The euro moved marginally higher vis-à-vis the British pound as the single currency tested offers around the £0.6835 level and was supported around the £0.6815 level.


The Swiss franc weakened vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.3150 level and was supported around the CHF 1.3065 level. Chartists continue to eye the CHF 1.3195 and CHF 1.3285 levels as upside targets for the pair. Heightened geopolitical tensions involving Iran and Nigeria have some traders on edge and any inflammation in those or other global hotspots could leave to safe-haven buying of the Swiss franc. Dollar bids are cited around the CHF 1.3045 level. The euro and British pound gained ground vis-à-vis the Swiss franc as the crosses tested offers around the CHF 1.5620 level and CHF 2.2875 levels, respectively.


The Australian dollar came off vis-à-vis the U.S. dollar today as the Aussie tested bids around the US$ 0.7340 level and was capped around the $0.7390 level. Technically, the pair continues to hover around the 61.8% retracement of the move from $0.7235 to $0.7585. Reserve Bank of Australia Deputy Governor Stevens spoke overnight and said the U.S.’s large trade and current account deficits are impacting growth everywhere but lauded the global economy’s ability to average GDP expansion of 3.8% since 1996. Stevens was generally hawkish in his remarks and his comments followed RBA Governor Macfarlane’s comments on Friday that the next move in the official cash rate will likely be higher rather than lower on account of inflationary pressures. Data released in Australia overnight saw the Q4 wage cost index rise 0.9% q/q and 4.2% y/y. A$ offers are cited around the US$ 0.7410 level.


The Canadian dollar moved marginally lower vis-à-vis the U.S. dollar today as the greenback tested offers around the C$ 1.1510 level and was supported around the C$ 1.1460 level. Data released in Canada today saw January consumer prices rise 2.8% y/y, up from December’s 2.2% y/y rise. These data followed recent data that saw Canadian retail sales were higher in December for the third consecutive month, up 0.3% and above expectations. Bank of Canada reported is clearly in a tightening mode, energy prices remain elevated, and Canada enjoys twin surpluses in its fiscal and current accounts. These factors mean the pair could easy fall to new multi-year lows. U.S. dollar offers are cited around the C$1.1535/ 85 levels.


The New Zealand dollar lost significant ground vis-à-vis the U.S. dollar today as kiwis tested bids around the US$ 0.6560 level and was capped around the $0.6625 level. The pair has been heading south after failing to hold the $0.6800 figure and is now trading at seventeen-month lows. There was market chatter that Japanese banks are warning Japanese investors against purchasing so-called uridashi bonds like the New Zealand dollar on account of New Zealand’s deteriorating economic fundamentals. Kiwi offers are cited around the US$ 0.6645 level.


Gold depreciated vis-à-vis the U.S. dollar today as gold tested bids around the US$ 547.20 level after running out of steam around the $554.80 level. The metal continues to trade in a relatively narrow band after trading in daily ranges of $15-20 earlier this month and prices are off some 4% after reaching 25-year highs of $574.60. A suspension of production operations at a large mine in Indonesia could dislocate some 63,000 ounces of gold per week. Most gold traders report continued strong sentiment in the marketplace despite recent consolidation. Anglo American Plc, the third largest global mining company, notched a 39% rise in 2005 earnings.

Crude oil

Crude oil depreciated vis-à-vis the U.S. dollar today as gold tested bids around the US$ 62.28 level. April U.S. crude futures were off about 46 cents just days after Nigerian militants attached production facilities in that country. Concerns about Iran’s nuclear ambitions have also been pushing oil higher. In other oil news, Ecuador has stopped producing oil and this disrupts up to 144,000 barrels per day on top of Royal Dutch Shell’s 455,000 barrels per day dislocation in Nigeria. The war of words between the U.S. and Venezuela also threatens to spur higher prices.


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