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Monday March 6, 2006 - 14:56:23 GMT
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Forex and Commodity Market Commentary and Analysis (6 March 2006)

The euro weakened vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.2015 level and was capped around the $1.2090 level. Technically, the pair briefly traded above the 50% retracement level of the move from $1.2325 to $1.1825 and later orbited the 38.2% retracement of the same range. European Central Bank President Trichet maintained a hawkish tone in remarks today saying “We considered that there was an increase in medium term inflation risks” in discussing last week’s decision to raise rated by +25bps. Trichet also reiterated monetary policy remains “accommodative” but added upcoming economic data will drive the central bank’s policy. Many traders believe the ECB will continue to tighten monetary policy on account of nagging inflation pressures. Data released in the eurozone today saw EMU-12 retail sales up 0.8% m/m and 0.9% y/y in January. In U.S. news, traders await the released of January factory orders data today amid forecasts of a 5.9% pullback following the 10.2% fall in durable goods in January. Minneapolis Fed President Stern on Friday predicted “respectable growth” for the U.S. economy over the next two years and suggested a possible downturn in the housing market may have been “overstated.” He added the economy “really isn’t fragile at all” and added it’s “fully appropriate” for the Fed to be “more data-driven.” The big question on traders’ minds is whether or not the Federal Open Market Committee will lift the federal funds target rate at the end of this month. Chicago Fed President Moskow speaks tomorrow and Q4 productivity and labour costs data will also be released tomorrow. Euro offers are cited around the US$ 1.2060/ 1.2110 levels.

¥/ CNY

The yen depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥117.30 level and was supported around the ¥116.05 level. Stops were reached above the ¥117.10 level, representing the 38.2% retracement of the move from ¥113.40 to ¥119.40. The yen was dented after a government survey confirmed combined corporate capital spending rose 9.5% y/y in the October – December period, the eleventh straight quarterly improvement, but it was off 0.4% q/q. Traders reduced long yen exposure on the notion the government may be forced to downwardly revise GDP data for that period that was reported at an annualized +5.5% clip. Revised figures are expected on 13 March. Chief Cabinet Secretary Abe said the government will not interfere with Bank of Japan’s decision on when to unwind its long-standing quantitative easing policy but added the government believes deflation continues. Many traders believe the BoJ Policy Board will announce a shift in policy as early as Thursday’s monetary policy meeting while others see 28 April as a more suitable time. BoJ Governor Fukui today said “We are entering an important phase as the situation surrounding the economy and prices are heading toward a favorable direction. We want to support (the Japanese economy) by implementing monetary policies in an appropriate way at an appropriate time.” Prime Minister Koizumi, however, said “I don't think we can say we have departed from deflation.” The yen was also dented by news that Japan’s Softbank may acquire Vodafone’s Japanese business unit along with a media report that U.S. automotive giant General Motors Corp. may sell a 20% stake in Suzuki Motor Corp. Japanese February reserve assets will be released tonight followed by February bank lending data tomorrow. The Nikkei 225 stock index gained 1.52% to close at ¥15,901.16. Dollar bids are cited around the ¥116.80/ 30 levels. The euro climbed higher vis-à-vis the yen as the single currency tested offers around the ¥141.30 level and was supported around the ¥140.15 level. Stops were hit above the ¥141.10 level, representing 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 ¥206.05 and ¥90.05 levels, respectively. The Chinese yuan appreciated vis-à-vis the U.S. dollar today as the greenback closed at CNY 8.0374 in the over-the-counter market, down from CNY 8.0382, and at CNY 8.0365 in the exchange-traded market. People’s Bank of China Governor Zhou spoke about the central bank’s FX reserves today saying “Some people worry that the central bank will reduce its overall US dollar (reserve) holdings, but that's not going to happen… We will continue to manage foreign exchange reserves on the principles of security, liquidity and valuation.” Zhou added “The next step is to relax the controls on the management and remittance of foreign currency.” An influential Chinese government advisor this weekend said the government should widen the yuan’s trading band vis-à-vis the U.S. dollar by 0.5% to 1.0%. Separately, the National Development and Reform Commission reported China will “optimize” the structure of its FX reserves and added it will keep the yuan stable. China officially had about US$ 818.9 billion in FX reserves at the end of 2005.

The British pound came off vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.7525 level after testing offers around the $1.7625 level, the 38.2% retracement of the move from $1.7130 to $1.7935. The big item on traders’ screens this week is Wednesday’s and Thursday’s Bank of England Monetary Policy Committee meeting. Most traders do not expect the central bank to reduce interest rates at this time. The housing market has stabilized to a large degree but there are recent reports the manufacturing sector is beginning to deteriorate. Additionally, retail sales appear to have slumped at the beginning of the year and if this trend continues, a monetary easing may be in the cards before the end of H1 2006, particularly if inflation pressures and inflation expectations lessen. Traders await the release of British Retail Consortium’s retail sales survey tonight. Cable offers are cited around the US$ 1.7600 figure. The euro came off vis-à-vis the British pound as the single currency tested bids around the £0.6850 level and was capped around the £0.6875 level.


The Swiss franc lost marginal ground vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.2895 level and was capped around the CHF 1.2995 level. Technically, today’s intraday low was just above the 38.2% retracement of the move from CHF 1.2240 to CHF 1.3285. Heightened geopolitical risks including situations in Iran, Iraq, and Nigeria continue to preoccupy traders and increases in tensions could result in safe-haven buying of the franc. The February unemployment rate will be released tomorrow. Dollar bids are cited around the CHF 1.2875 level. The euro and British pound came off vis-à-vis the Swiss franc as the crosses tested bids around the CHF 1.5590 and CHF 2.2690 levels, respectively.


The Australian dollar weakened vis-à-vis the U.S. dollar today as the Aussie tested bids around the US$ 0.7425 level and was capped around the $0.7480 level. The pair has recently had a difficult time eclipsing the $0.7485 level. February Australian jobs data are due on Thursday and the unemployment rate was at 5.3% in January. Reserve Bank of Australia announces its interest rate decision tomorrow. Data released overnight saw ANZ February job advertisements rise 0.5% m/m and 20.0% y/y. Australian dollar offers are cited around the US$ 0.7490 level.


The Canadian dollar weakened vis-à-vis the U.S. dollar today as the greenback tested offers around the C$ 1.1390 level and was supported around the C$ 1.1330 level. Building permits data and the February Ivey PMI report will be released today. Bank of Canada’s interest rate decision is scheduled for tomorrow. U.S. dollar offers are cited around the C$ 1.1395 level.


The New Zealand dollar extended recent losses vis-à-vis the U.S. dollar today as the kiwi tested bids around the US$ 0.6595 level and was capped around the $0.6675 level. Stops were triggered below the $0.6645 level, representing the 23.6% retracement of the move from C$ 0.6915 to C$ 0.6560. Reserve Bank of New Zealand’s interest rate decision is expected on Thursday. New Zealand dollar offers are cited around the US$ 0.6696 level.

Gold/ Silver

Gold depreciated vis-à-vis the U.S. dollar today as the yellow metal tested bids around the US$ 564.15 level after testing offers around the $568.15 level. The meeting of the International Atomic Energy Agency’s Board of Governors today is being closely watched as they may decide to refer Iran to the United Nations Security Council over Iran’s uranium enrichment activities. Traders are curious to see if ongoing geopolitical circumstances can cause the pair to move above its recent multi-decade high of $574.60. Silver managed to eke out gains vis-à-vis the U.S. dollar as silver tested offers around the US$ 10.25 level and was supported around the $10.11 level. Speculation that U.S. regulators will soon approve an exchange-traded fund dedicated to silver has silver bulls pushing prices higher.

Crude oil

Crude oil fell vis-à-vis the U.S. dollar today as front-month NYMEX crude futures tested bids around the US$ 63.05 level after running out of steam around the $63.85 level. Prices came off after Saudi oil minister Ali al-Naimi said OPEC should not reduce oil production when officials meet on Wednesday. Iran, however, yesterday vowed to resume atomic fuel production if the IAEA refers it to the UN’s Security Council. Traders are also monitoring developments in Nigeria where militants continue to disrupt oil production capabilities.


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