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Tuesday March 7, 2006 - 15:00:32 GMT
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Forex and Commodity Market Commentary and Analysis (7 March 2006)

The euro lost major ground vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.1890 level and was capped around the $1.2020 level. Technically, today’s intraday high was just above the 38.2% retracement of the move from $1.2325 to $1.1825. Traders pushed the common currency lower after St. Louis Fed President Poole reiterate the Federal Reserve may raise interest rates further if economic data print better-than-expected. Poole also speaks tomorrow morning about the U.S. housing market and a recent study indicates he is the Fed official whose comments move the market the most. Last week’s ISM services survey and expectations of a strong February U.S. non-farm payrolls report on Friday have dollar bulls on the offensive. The Federal Open Market Committee will next convene on 27-28 March and is expected to lift the federal funds target rate by +25bps to 4.75%. The fed funds futures market is pricing in a 60% chance the fed funds futures target rate will be 5.00% by May, meaning another rate hike could be in the cards for the 10 May FOMC meeting. A potential bright spot for the euro this week could be Thursday’s January trade balance data, particularly if U.S. imports expanded at a faster pace than exports. The U.S.’s ability to finance its trade deficit is a structural imbalance that periodically supersedes other concerns like relative growth rates and interest rate differentials. Data released in the U.S. today saw Q4 final productivity come in at -0.5% while unit labour costs were downwardly revised to 3.3% from 3.5%, still hotter-than-expected. Q4 2005 economic data have some economists and traders scratching their heads. The preliminary growth rate for the U.S. came in below the growth rates of the eurozone and Japan and productivity was negative. Most market participants believe the U.S. economy improved markedly in Q1 2006. In eurozone news, German manufacturing orders climbed 1.4% m/m in January, just above expectations, but the common currency failed gain much mileage on this number. Euro offers are cited around the US$ 1.1980/ 1.2015 levels.

¥/ CNY

The yen extended recent losses vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥118.05 level and was supported around the ¥117.35 level. Technically, today’s intraday low was just below the 50% retracement of the move from ¥121.40 to ¥113.40. Data released in Japan today saw February machine tool orders climb 5.3% y/y while Japan’s FX reserves totaled US$ 850.67 billion at the end of last month, down from US$ 851.67 billion. Many traders are on the sidelines at the moment ahead of tomorrow’s and Thursday’s Bank of Japan Policy Board meeting. Some dealers believe the central bank will begin to unwind its long-standing quantitative easing policy in which it flooded the market with surplus liquidity while others believe 28 April may be a more suitable BoJ meeting date to shift the policy. The yen was dented by a Nikkei report that speculated Q4 2005 GDP may be downwardly revised to a growth rate of 1.3% q/q and an annualized 5.1% y/y, down from preliminary 1.4% q/q and 5.5% y/y estimates. The Nikkei 225 stock index lost 1.10% to close at ¥15,726.02. Dollar bids are cited around the ¥117.20/ 116.80 levels. The euro dropped sharply vis-à-vis the yen as the single currency tested bids around the ¥140.15 level and was capped around the ¥141.30 level. The British pound and Swiss franc weakened vis-à-vis the yen as the crosses tested bids around the ¥204.30 and ¥89.70 levels, respectively. The Chinese yuan depreciated vis-à-vis the U.S. dollar as the greenback closed at CNY 8.0424 in the exchange-traded market, up from CNY 8.0365, and at CNY 8.0433 in the over-the-counter market, up from CNY 8.0374. People’s Bank of China’s Hu Pingxi said “The yuan's value will be kept basically stable in 2006, and I don't see any big fluctuations. The yuan rate will move, both upward and downward, within a certain range.”

The British pound tumbled vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.7325 level and was capped around the $1.7505 level. Stops were reached below the $1.7390 level, representing the 23.6% retracement of the move from $1.8495 to $1.7045. Today’s intraday low was the weakest showing since 17 February. BRC reported like-for-like retail sales gained 0.6% y/y in February, less-than-expected, and up marginally from a very weak January report. These data are very important because final private demand and consumption are key components of U.K. GDP. Sagging retail sales growth suggest Bank of England’s Monetary Policy Committee may be more inclined to expand monetary policy and lower interest rates – a policy response that would lead to a weaker pound. Cable offer are cited around the US$ 1.7485 level. The euro came off vis-à-vis the British pound as the single currency tested bids around the £0.6845 level and was capped around the £0.6870 level.


The Swiss franc came off significantly vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.3145 level and was supported around the CHF 1.2975 level. Technically, today’s intraday low was just above the 38.2% retracement of the move from CHF 1.2240 to CHF 1.3285. Data released in Switzerland today saw the February unemployment rate decline to 3.8% from 3.9% in January. Traders continue to monitor heightened geopolitical risks involving Iran, Iraq, and Nigeria. Talk of a possible Russian-brokered diplomatic solution to the Iranian nuclear saga could be negative for the Swiss franc. Dollar bids are cited around the CHF 1.2950 level. The euro and British pound moved higher vis-à-vis the Swiss franc as the crosses tested offers around the CHF 1.5625 and CHF 2.2795 levels, respectively.


The Australian dollar weakened vis-à-vis the U.S. dollar today as the Aussie tested bids around the US$ 0.7345 level and was capped around the $ 0.7405 level. Today’s intraday low was just above multi-month lows. Dun & Bradstreet reported Australian companies became more confident about their business expectations last month in a survey released today. Reserve Bank of Australia’s interest rate decision is scheduled for later today. Australian dollar offers are cited around the US$ 0.7395 level.


The Canadian dollar depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the C$ 1.1475 level and was supported around the C$ 1.1390 level. Stops were reached above the C$ 1.1430/ 60 levels, representing the 50% and 61.8% retracements of the move from C$ 1.1555 to C$ 1.1300. Bank of Canada raised its overnight target rate by +25bps today to 3.75% and the Bank Rate was lifted to 4%. BoC reported the loonie has been stronger than expected and both GDP and inflation have been consistent with expectations. The central bank’s next Monetary Policy Report is released on 27 April and its next interest rate meeting is 25 April. U.S. dollar offers are cited around the C$ 1.1495 level.


The New Zealand dollar fell vis-à-vis the U.S. dollar today as the kiwi tested bids around the US$ 0.6480 level after topping out around the $ 0.6575 level. Today’s low represents the pair’s weakest print since September 2004. Reserve Bank of New Zealand is expected to keep monetary policy unchanged when policymakers convene on Thursday with the key rate remaining at 7.25%. Some traders, however, expect RBNZ to reduce interest rates as early as September. New Zealand dollar offers are cited around the US$ 0.6580 level.

Gold/ Silver

Gold trudged higher vis-à-vis the U.S. dollar today as the yellow metal tested offers around the US$ 563.0 level and was supported around the $553.25 level. The pair is still off of its 25-year high of $574.60 dating to early February and remains in a consolidating mode absent fresh market news. Gold bulls, however, are keeping the pair supported on account of inflation concerns, economic growth concerns, and heightened geopolitical risks. Silver gained ground vis-à-vis the U.S. dollar as the pair tested offers around the US$ 10.19 level and was supported around the $ 9.95 level. Speculation the U.S. Securities and Exchange Commission will soon approve a silver-backed, exchange-traded fund by Barclay’s Global Investors International is bullish for the pair.

Crude oil

Crude oil was marginally lower vis-à-vis the U.S. dollar today as April-dated NYMEX light crude futures tested bids around the $62.15 level and was capped around the $62.80 level. The pair steadied around the $62.40 level in North American dealing. The IAEA reported it hopes to reach a nuclear agreement with Iran in about a week and some traders sold crude on reports that Moscow is brokering a compromise solution to Iran’s liking regarding its uranium enrichment activities. Traders also continue to monitor developments in Nigeria where rebels continue to disrupt production capacity. OPEC meets tomorrow in Vienna and is not expected to reduce supplies at this time.


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