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Wednesday March 8, 2006 - 15:17:42 GMT
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Forex and Commodity Market Commentary and Analysis (8 March 2006)

The euro gained ground vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.1940 level and was supported around the $1.1870 level. Technically, today’s intraday high was right around the 23.6% retracement of the move from $1.2320 to $1.1825. Today’s price activity was driven by hawkish remarks from both U.S. and European policymakers. First, Chicago Fed President Moskow spoke last night and said “With the unemployment rate currently at 4.7% and capacity utilization near its long-run average, it is important to ask how much slack remains in the economy.” Moskow added rates may need to move higher to keep inflation expectations in check. Similarly, European Central Bank Governing Council Weber reported the eurozone economy is awash with extra liquidity and added price risks remain even after the ECB has tightened policy twice. St. Louis Fed President Poole spoke today and said the U.S. housing market will remain stable and robust in 2006 and added he does not see any signs of a housing market bubble. Whereas most traders believe the Federal Open Market Committee will tighten policy again on 28 March, most traders believe the ECB is not yet finished with its current tightening regime. As a reflection if this, yields on two-year EMU-12 government bonds reached 3.19% yesterday, their highest level since 2002. ECB policymaker Mersch speaks later in the day. Traders are also awaiting comments from Fed Chairman Bernanke today. In other ECB interest rate news, EMU-12 finance ministers will convene on Monday night and are expected to discuss monetary policy. Some finance ministers continue to press the ECB to not raise interest rates. All eyes are on Friday’s U.S. February non-farm payrolls data with most traders expecting a robust showing, especially since weekly initial jobless claims data have remained below 300,000 for many weeks and the labour market is showing signs of little slack. Euro offers are cited around the US$ 1.1960/ 1.2020 levels.

¥/ CNY

The yen was little-changed vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥117.95 level and was supported around the ¥117.30 level. Technically, today’s intraday low was just below the 50% retracement of the move from ¥121.40 to ¥113.40 and today’s intraday high was just below the 23.6% retracement of the move from ¥113.40 to ¥119.40. The big news comes tonight when Bank of Japan’s Policy Board announces its monetary policy decision. Some traders believe the central bank will begin to unwind its long-standing quantitative easing policy and move to an inflation target where it seeks to keep the unsecured overnight call rate at a very low level. Others believe the BoJ will not shift policy now and will instead wait for this month’s end of the current fiscal year, rendering the Policy Board meeting on 28 April as the a suitable time for a policy shift. Data released in Japan overnight saw bank lending rise in February for the first time since December 1997, up 0.2% y/y. These data are important as they evidence an increased demand for funds, one indication that deflation is ending. Other data saw the February economy watchers’ index rise 1.4 index points from January, the third rise in four months, while the January leading index rose to 85.0 from a revised 75.0 in December. The Nikkei 225 stock index lost 0.63% to close at ¥15,627.49. Dollar bids are cited around the ¥117.10/ 116.40 levels. The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥140.60 level and was supported around the ¥139.55 level. Technically, today’s intraday low was right around the 38.2% retracement of the move from ¥143.60 to ¥137.10. The British pound came off marginally vis-à-vis the Swiss franc as sterling tested bids around the ¥203.75 level while the Swiss franc gained ground vis-à-vis the Swiss franc and tested offers around the ¥90.10 level. The Chinese yuan weakened vis-à-vis the U.S. dollar in the exchange-traded market as the greenback closed at CNY 8.0481, up from CNY 8.0424. In Chinese news, U.S. Treasury Secretary Snow reiterated the U.S. will press Chinese President Hu Jintao on the yuan exchange rate issue when Hu visits Washington, D.C. next month.

The British pound was little-changed vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.7415 level and was supported around the $1.7340 level. Technically, today’s intraday low was just below the 76.4% retracement of the move from $1.7280 to $1.7595. Data released in the U.K. today saw February Halifax house prices climb 1.4% m/m and 5.5% y/y. These data are important as they are additional evidence of a stabilization in the key housing market sector. In fact, the housing market remains the only significant bright spot in the U.K. economy as retail sales are down, manufacturing remains relatively beleaguered, and Nationwide today report that U.K. consumer sentiment “remains fragile and the outlook is gloomy.” Bank of England Monetary Policy Committee members are weighing these and other factors today and tomorrow and are not expected to alter monetary policy at this time. Many dealers, however, believe the MPC will reduce interest rates in H1 2006. Other data released today saw REC confirm wage inflation decelerated last month while jobs growth slumped to a 2 ½-year low. Also, BRC released a survey showing a continued decline in U.K. shop prices. Cable offers are cited around the US$ 1.7435 level. The euro gained ground vis-à-vis the British pound as the single currency tested offers around the £0.6865 level and was supported around the £0.6840 level.


The Swiss franc moved higher vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.3075 level and was capped around the CHF 1.3145 level. Technically, today’s intraday low was right around the 23.6% retracement of the move from CHF 1.2555 to CHF 1.3235. Traders continue to monitor heightened geopolitical risks involving Iran, Iraq, Nigeria, and other hotspots to see if they will precipitate some safe-haven buying of the Swiss franc. Dollar bids are cited around the CHF 1.3045 level. The euro and British pound weakened vis-à-vis the Swiss franc as the crosses tested bids around the CHF 1.5590 and CHF 2.2720 level, respectively.


The Australian dollar came off marginally vis-à-vis the U.S. dollar today as the Aussie tested bids around the US$ 0.7315 level and was capped around the $0.7360 level. As expected, Reserve Bank of Australia left interest rates unchanged at 5.50% and this means the official cash rate was last changed twelve months ago. Inflation remains subdued, growth is moderating, and Australian home-building approvals are languishing near five-year lows. The economy is trudging along at its slowest pace since 2001 and RBA Governor Macfarlane last month said rates will likely remain steady. Australian dollar offers are cited around the US$ 0.7355/ 80 levels.


The Canadian dollar weakened vis-à-vis the U.S. dollar today as the greenback tested offers around the C$ 1.1545 level and was supported around the C$ 1.1470 level. Many traders are reassessing their outlook for Canadian monetary policy after Bank of Canada tightened interest rates yesterday and a somewhat dovish statement from the central bank. BoC noted modest rises in interest rates “may” be required but the Canadian greenback remains near multi-year highs. U.S. dollar offers are cited around the C$ 1.1555/ 1.1645 levels.


The New Zealand dollar came off vis-à-vis the U.S. dollar today as the kiwi tested bids around the US$ 0.6470 level and was capped around the US$ 0.6520 level. The pair has recently established eighteen-month lows as traders discount no change in interest rates by Reserve Bank of New Zealand tomorrow with the short-term rate remaining at 7.25%. The New Zealand government has indicated it does not believe its 2.1% GDP target for 2006 will be met and this has many traders questioning why RBNZ is retaining some of its hawkishness. New Zealand dollar offers are cited around the US$ 0.6580 level.

Gold/ Silver

Gold extended recent losses vis-à-vis the U.S. dollar today as the yellow metal tested bids around the US$ 542.40 level after capping out around the $553.60 level. Funds continue to sell gold but some physical demand is supporting the market near key technical retracement levels. Silver came off vis-à-vis the U.S. dollar and tested bids around the US$ 9.66 level after running out of steam around the $10.08 level. Silver traders still await word on whether or not the Securities and Exchange Commission will approve a request by Barclay’s to create a silver-backed, exchange-traded fund.

Crude oil

Crude oil slumped vis-à-vis the U.S. dollar today as front-month NYMEX futures tested bids around the US$ 60.90 level after encountering resistance around the $61.74 level. Russia seems to have shied away from its proposal to oversee Iranian uranium enrichment in an attempt to end Iran’s nuclear standoff with the global community. Iran today said it “will not use the oil weapon now because we don’t want to confront other countries….the U.Ss. may have the power to cause harm and pain but it is also susceptible to harm and pain.” OPEC ministers convened in Vienna today and pledged to keep global oil supplies at healthy levels. One area on the radar of traders is the Amazon area of Ecuador were workers have staged a strike and a state of emergency has been declared. Traders await U.S. weekly oil stocks data today.


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