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Friday March 10, 2006 - 15:00:18 GMT
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Forex and Commodity Market Commentary and Analysis (10 March 2006)

The euro shed marginal ground vis-à-vis the U.S. dollar today as the single currency tested bidsaround the US$ 1.1890 level and was capped around the $1.1925 level. Technically, today’s intraday high and low are around the 61.8% and 76.4% retracements of the move from $1.1825 to $1.2090. The big news in the U.S. today was of course the February non-farm payrolls number. The jobs report for last month came in better-than-expected with 243,000 new jobs created, about 20,000 more than consensus forecasts and this means about 2.1 million new jobs have been created in the past year. The unemployment rate ticked up to 4.8% from 4.7% and average hourly earnings were up +0.3% and 3.5% y/y. This means average hourly earnings growth exceeds the rate of inflation and continues to fuel final private demand and consumption. On a negative note, the January non-farm payrolls number was downwardly revised to 170,000 from 193,000. The question on traders’ minds is how today’s data impact monetary policy, if at all. Most traders believe the Federal Open Market Committee will lift the federal funds target rate by +25bps to 4.75% on 28 March, and a smaller percentage of traders also expect a move higher to 5.00% on 10 May. Given an unemployment rate below 5.0%, the U.S. economy is at or near the technical definition of full employment and a continued pick-up in average hourly earnings and wage growth will be of concern to hawkish policymakers. In short, the Fed’s job is not exactly done yet. Some dealers believe the U.S. dollar’s gains are being limited by yesterday’s vote of the U.S. House Appropriations Committee to prevent Dubai World Ports from acquiring U.S. ports. This could be negative for the greenback because petrodollar-rich Middle East investors may reduce exposure to U.S. assets or scale back their allocations there. In eurozone news, Germany’s January current account surplus fell to €5.1 billion from €6.0 billion in December. Also, it was reported that German February CPI was up 0.4% m/m and 2.1% y/y. Euro offers are cited around the US$ 1.1940/ 1.2015 levels.

¥/ CNY

The yen came off marginally vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥118.70 level and was supported just below the ¥118.00 figure. Technically, today’s intraday low was right around the 23.6% retracement of the move from ¥113.40 to ¥119.40. Dollar bulls extended the pair’s recent gains after Bank of Japan Governor Fukui said the central bank may have “some leeway” before it begins raising short-term interest rates, especially if consumer prices remain dampened. This has some traders believing Japanese investors will continue to invest overseas in significant volumes, hence the need to sell yen and buy dollars. Yesterday’s announcement that BoJ was ending its long-standing quantitative easing policy was well-telegraphed to traders, as was the announcement policymakers would seek to keep consumer inflation between 0% and 2%, a de facto inflation target if not an explicit one. In fact, the Japanese government bond market has priced in a little bit more than one monetary tightening by the end of 2006. It is probable, however, that government officials will privately and publicly press the central bank to not raise interest rates too much. The prospect of relatively low rates also encourages more carry trades where investors will borrow and sell yen to invest in higher yielding currencies and assets. Data released overnight saw the February consumer goods price index rise 2.9% y/y while January core private-sector machinery orders were off 6.2% m/m. Additionally, January household spending was down 3.5% y/y. The Nikkei 225 stock index gained 0.49% to close at ¥16,115.63. Dollar bids are cited around the ¥118.00/ ¥117.60 levels. The euro gained ground vis-à-vis the yen as the single currency tested offers around the ¥141.30 level and was supported around the ¥140.40 level. Technically, today’s intraday low was just above the 50% retracement of the move from ¥143.60 to ¥137.10. The British pound and Swiss franc moved higher vis-à-vis the yen as the crosses tested offers around the ¥205.95 and ¥90.20 levels, respectively. The Chinese yuan depreciated vis-à-vis the U.S. dollar as the greenback closed at CNY 8.0511 in over-the-counter trade, up from CNY 8.0493. Data released in China today saw February producer price inflation rise 3.0% y/y. The big news involving China over the past day involved eye-raising comments made by New York Fed President Geithner who said China’s continued purchases of U.S. dollar assets increases the risk of inflation in the U.S. Geither said “This pattern of exchange-rate and monetary-policy arrangements and the associated scale of official intervention in markets complicate our ability to assess the underlying economic conditions in our economies and to forecast the future path of output and inflation.” He added large-scale dollar purchases can yield “a false sense of reassurance that we can continue to run large structural deficits without the risk of crowding out private investment.”

The British pound depreciated vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.7290 level after running out of steam around the $1.7425 level. Stops were triggered below the $1.7320 level, representing the 76.4% retracement of the move from $1.7130 to $1.7935. NIESR today reported the U.K. economy is likely to have expanded by 0.7% in the three months to the end of February, around the U.K. economy’s long-term trend growth rate. These data are significant because they suggest there may be less pressure on Bank of England to expand monetary policy. The interest rate picture for the BoE’s Monetary Policy Committee is complex. Consumer price inflation is currently below the 2.0% target rate but is expected to be at or above in about two years’ time. Also, the U.K. housing market sector has stabilized but retail sales, consumption, the manufacturing sector, and the labour market are all worsening. Cable offers are cited around the US$ 1.7355/ 1.7400 levels. The euro gained ground vis-à-vis the British pound as the single currency tested offers around the £0.6880 level and was supported around the £0.6850 level.


The Swiss franc moved lower vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.3190 level and was supported around the CHF 1.3120 level. Stops were hit above the 76.4% retracement of the move from CHF 1.3235 to CHF 1.2895. No major Swiss economic data were released today. Traders continue to monitor heightened geopolitical risks involving Iran, Iraq, Nigeria, Ecuador, and elsewhere to see if they will lead to safe haven-related purchasing of the Swiss franc. Dollar bids are cited around the CHF 1.3105/ CHF 1.3065 levels. The euro moved higher vis-à-vis the Swiss franc as the single currency tested offers around the CHF 1.5695 level and was supported around the CHF 1.5640 level while the British pound came off vis-à-vis the Swiss franc and tested bids around the CHF 2.2780 level.


The Australian dollar moved lower vis-à-vis the U.S. dollar today as the Aussie tested bids around the US$ 0.7315 level and was capped around the $0.7370 level. Technically, the pair stopped short of testing the 50% retracement of the move from $0.7485 to $0.7315. Data released in Australia overnight saw January housing approvals unchanged m/m, below market expectations. Australian dollar offers are cited around the US$ 0.7420 level.


The Canadian dollar weakened vis-à-vis the U.S. dollar today as the greenback tested offers around the C$ 1.1650 level and was supported around the C$ 1.1585 level. Technically, today’s intraday high was just above the 50% retracement of the move from C$ 1.1975 to C$ 1.1300. Data released in Canada today saw the February unemployment rate fall to 6.4% from 6.6% in January, equal to November’s level and the lowest level in 30 years. About 25,000 new jobs were created last month and about 275,000 new jobs have been created in the past year. U.S. dollar offers are cited around the C$ 1.1715/ 1.1815 levels.


The New Zealand dollar weakened vis-à-vis the U.S. dollar today as the kiwi tested bids around the US$ 0.6410 level after running out of steam around the $0.6550 level. Chartists are eyeing the $0.6275 level as a major target for the pair and some bears are contemplating life around the psychologically-important $0.6000 figure. Reserve Bank of New Zealand’s Bollard intimated the central bank is not inclined to ease monetary policy this year. New Zealand dollar offers are cited around the US$0.6530 level.
Gold/ Silver
Gold came off vis-à-vis the U.S. dollar today as the yellow metal tested bids around the US$ 533.80 level after running out of steam around the $546.70 level. Today’s lows are at or near three-week lows and are off some $40.00 from recent multi-year highs. Some dealers are encouraged by the approaching months when physical demand picks up in India, Thailand, Malaysia and elsewhere. Silver extended its recent pullback vis-à-vis the U.S. dollar as the pair tested bids around the US$ 9.73 level and was capped around the $9.96 level. Traders continue to await news about U.S. regulatory authorities’ possible approval of a new silver-backed, exchange-traded fund.

Crude oil

Crude oil pushed lower vis-à-vis the U.S. dollar today as April-dated light, sweet crude futures tested bids just below the psychologically-important US$ 60.00 figure and failed to move above the $60.78 level. More militant activity in Nigeria yesterday did not have a major impact on the pair and neither did news that OPEC plans to ship less oil over the next four weeks. News that soldiers in Ecuador have partially ended an oil workers’ strike in the Amazon but it could take a couple of months to get production back to previous levels. Traders also continue to monitor developments involving Iran’s nuclear ambitions.


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