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Thursday March 9, 2006 - 13:40:03 GMT
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Forex and Commodity Market Commentary and Analysis (9 March 2006)

The euro was little-changed vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.1950 level and was supported around the $1.1910 level. Today’s range was relatively tight as the common currency tries to reclaim the $1.1950 level and make another assault on the psychologically-important US$ 1.2000 figure. Hawkish Fedspeak continues to take some wind out of the euro’s sails. St. Louis Fed President Poole said he believes housing activity will “stabilize and remain at a high level this year” and added job growth will continue to be “healthy.” Poole also said inflation expectations “are quite well anchored” and said the economy is “strong and stable…it is hard to imagine…the outlook could be more stable and healthier than it is right now.” Traders will get a decent indication about the strength of the labour market tomorrow when February non-farm payrolls data are released. Most economists are anticipating a healthy number and possible upward revisions to January’s tally of 193,000 new jobs. Data released in the U.S. today saw the January trade deficit print at a worse-than-expected US$ 68.5 billion, up from January’s revised tally of US$ 65.07 billion. Also, weekly initial jobless claims were up 8,000 to 303,000. As always, traders await the January Treasury International Capital data to determine if the U.S. financed its January trade deficit with foreign portfolio investment inflows two months ago. Fed officials including New York Fed President Geithner and Fed Governor Kohn are scheduled to speak today. In eurozone news, the European Central Bank’s March monthly bulletin was relatively hawkish as the central bank reiterated interest rates remain very low despite last week’s +25bps monetary tightening. The central bank added improvements in consumer and industrial confidence are likely to help “sustain” the EMU-12 economy’s recent improvement. ECB member Weber last night warned that a proposed increase in Germany’s value-added tax next year could force wages to move higher and cause inflation to increase. Data released in Germany today saw January industrial output off 0.1 m/m and Germany’s IfW economic institute lifted its 2006 GDP forecast to 2.1% from 1.5%. Euro offers are cited around the US$ 1.1960/ 1.2015 levels.

¥/ CNY

The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥117.10 level and was capped around the ¥118.30 level. Technically, today’s intraday low was right around the 38.2% retracement of the move from ¥113.40 to ¥119.40. Bank of Japan’s Policy Board voted to unwind its long-standing quantitative easing policy overnight, an ultraeasy framework that has been in place for some five years. BoJ Governor Fukui noted the central bank will reduce the outstanding balance of current account deposits held at BoJ “very close” to ¥6 trillion “in three months.” Fukui added overnight calls rates will in theory remain “effectively at zero” and the central bank adopted a target of 0% - 2% for consumer price increases in the medium-to-long term. Fukui, however, was careful not to characterize this as an inflation target but rather a “shared understanding among the board members.” Separately, the central bank maintained its assessment of the economy in March and foresees a “steady recovery.” The yen briefly came off about 50 pips after news of the shift was announced but quickly moved to three-day lows. Today’s news is significant for traders because a reduction in surplus liquidity is consistent with higher borrowing costs and this creates less incentive for traders to engage in yen-selling carry trades. Japan enjoys a significant current account surplus meaning there is a natural tendency for the yen to appreciate. Higher interest rates in Japan can attract more Japanese and international interest in Japanese government bonds and lead to a strengthening in the yen. Capital flows data released overnight saw foreign investors as net buyers of Japanese equities last week. The Nikkei 225 stock index climbed 2.62% to close at ¥16,036.91. Dollar bids are cited around the ¥116.80/ 30 levels. The euro weakened vis-à-vis the yen as the single currency tested bids around the ¥139.75 level and was capped around the ¥141.10 level. Technically, today’s intraday high was right around the 61.8% retracement of the move from ¥143.60 to ¥137.10. The British pound and Swiss franc moved lower vis-à-vis the yen as the crosses tested bids around the ¥203.70 and ¥89.40 levels, respectively. The Chinese yuan depreciated vis-à-vis the U.S. dollar as the greenback closed at CNY 8.0493 in the over-the-counter market, up from CNY 8.0488, and at CNY 8.0490 in the exchange-traded market, up from CNY 8.0481. Former People’s Bank of China Governor Dai Xianglong said the central bank will permit foreign financial institutions to invest more in local banks and added. Other PBOC and government officials reiterated China will liberalize the yuan on its own time frame. Chinese President Hu Jintao visits the U.S. next month and will be pressured by the Bush administration for more flexibility in the exchange rate regime.

The British pound lost marginal ground vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.7345 level and was capped around the $1.7405 level. Technically, today’s intraday high was right around the 61.8% retracement of the move from $1.7280 to $1.7620. As expected, Bank of England’s Monetary Policy Committee voted to keep the repo rate unchanged at 4.50%. The central bank last moved on policy in August 2005 and minutes from today’s meeting will be released on 22 March. Many traders believe the BoE is moving towards a rate cut on account of slumping retail sales and final private demand. Data released in the U.K. today saw the January trade in goods deficit reduced to -£5.73 billion from -£6.1 billion in December, the narrowest imbalance since October 2005. Also, it was reported that industrial production gained 0.4% m/m, more-than-expected, while new construction orders were up 8.0% y/y in January. Additionally, the manufacturing sector notched a small 0.2% improvement two months ago and will likely make a positive contribution to Q1 GDP. Cable offers are cited around the US$ 1.7440 level. The euro gained fractional ground vis-à-vis the U.S. dollar today as the single currency tested offers around the £0.6875 level.


The Swiss franc moved lower vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.3115 level and was supported around the CHF 1.3060 level. Technically, today’s intraday low was just above the 50% retracement of the move from CHF 1.3235 to CHF 1.2895. Data released in Switzerland today saw the February consumer price index rise 0.3% m/m and 1.4% y/y, on the high side of forecasts. Traders continue to assess heightened geopolitical risks, particularly in Iran, Iran, and Nigeria for any potential impact on the franc. Dollar bids are cited around the CHF 1.3025 level. The euro and British pound appreciated vis-à-vis the Swiss franc as the crosses tested offers around the CHF 1.5640 and CHF 2.2790 levels, respectively.


The Australian dollar gained ground vis-à-vis the U.S. dollar today as the Aussie tested offers around the US$ 0.7375 level and was supported around the $ 0.7325 level. Data released in Australia today saw the jobless rate decline to 5.2% in February from January’s 5.3% level, representing the 30th monthly the unemployment rate has been below 6.0%. Treasury minister Costello said the data point to “continuing economic growth and a continuing growing economy.” Australian dollar offers are cited around the US$ 0.7380 level.


The Canadian dollar lost marginal ground vis-à-vis the U.S. dollar today as the greenback tested offers around the C$ 1.1570 level and was supported around the C$ 1.1525 level. The pair yesterday reached levels not seen since 17 February and technically the pair is looking to establish a base around the C$ 1.1515 level. Canadian housing price and trade data will be released today. U.S. dollar offers are cited around the C$ 1.1640 level.


The New Zealand dollar weakened vis-à-vis the U.S. dollar today as the kiwi tested bids around the US$ 0.6480 level and was capped around the $ 0.6525 level. As expected, Reserve Bank of Australia kept its official cash rate unchanged at 7.25% and effectively ruled out any monetary easings for 2006 on account of inflationary concerns despite a slowing economy. RBNZ Governor cited escalating labour costs and a strong housing sector as factors that are contributing to inflationary pressures. RBNZ has hiked rates nine times since January 2004 for a total of 225bps and predicts the annual inflation rate will average 3.25% in H1 2006 before slumping to 2.75% in H2 2006. New Zealand dollar offers are cited around the US$ 0.6580 level.

Gold/ Silver

Gold appreciated vis-à-vis the U.S. dollar today as the yellow metal tested offers around the US$ 547.40 level and was supported around the $539.45 level. The pair was off some 6.4% yesterday after investment funds reduced longs on account of renewed dollar strength. Physical demand was cited today and lingering concerns over Iran’s nuclear ambitions are also benefiting the pair. India, Indonesia, Thailand, and Malaysia remain decent buyers of physical gold. Silver moved higher vis-à-vis the U.S. dollar and tested offers around the US$ 9.89 level, up from $9.72. Traders await word from U.S. regulators about a new silver-backed, exchange-traded fund.

Crude oil

Crude oil appreciated vis-à-vis the U.S. dollar today as light crude for April delivery tested offers around the US$ 60.46 level and remained supported around the $59.75 level. U.S. government data released yesterday revealed crude stocks were up a significant 6.8 million barrels last week and more than 10% y/y to the highest level since May 1999. Also, OPEC yesterday announced no changes to its 28 million barrels per day production ceiling. Continued geopolitical risks involving Iran’s nuclear ambitions, Nigerian militants, and a strike in Ecuador’s Amazon region remain on traders’ radar screens.


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