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Tuesday March 21, 2006 - 14:48:51 GMT
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Forex and Commodity Market Commentary and Analysis (21 March 2006)

The euro moved lower vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.2120 level after failing to get above the $1.2165 level. Technically, today’s intraday low was just above the 50% retracement of the move from $1.2590 to $1.1640. The big news overnight involve a speech by Fed Chairman Bernanke who said “Although macroeconomic forecasting is fraught with hazards, I would not interpret the currently very flat yield curve as indicating a significant economic slowdown to come.” He added the impact of low bond yields on monetary policy is “not al all clear cut” and added the underlying reasons could either justify lower rates or higher rates. Bernanke did not offer any clues about the Federal Open Market Committee’s likely interest rate decision next week but most traders expect the federal funds target rate to rise by +25bps. Some dealers also anticipate an additional tightening on 10 May and a smaller minority actually believes the Fed will take the fed funds rate as high as 5.25% before ending its current tightening cycle. Bernanke also added the economy should continue growing even if the housing market moderates while Boston Fed President Minehan said the Fed “could be wrong” about the benign impact of a slowdown in the housing market. Data released in the U.S. today saw the February headline producer price index fall 1.4%, its largest decline in three years, while the ex-food and energy component was up +0.3%. On an annualized basis, the headline figure was up 3.7% y/y while the headline rate was up +1.7% y/y. Some economists noted these data evidenced a little bit of a pick-up in inflation in some sectors but for the most part, there does not appear to be a lot of producer-level inflation in the U.S. economy. Data released yesterday saw February leading economic indicators off 0.2%. In eurozone news, French February household consumption was up 1.8% m/m, significantly above expectations. European Central Bank member Weber said the central bank will react “appropriately” to inflation risks. Euro offers are cited around the US$ 1.2225 level.

¥/ CNY

The yen was little changed vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥116.90 level and was supported around the ¥116.25 level. Technically, the pair briefly traded above the 38.2% retracement of the move from ¥119.00 to ¥115.45. Bank of Japan Policy Board’s Mizuno overnight said the central bank can raise interest rates “at any time,” seemingly at odds with Governor Fukui’s recent remarks that borrowing costs will remain around zero per cent for quite some time. He was positive about the continued expansion of private domestic demand and the BoJ’s economic forecasts and added the “risk of renewed deflation is equal to the risk of an overheating in the economy and an upsurge in asset prices.” The central bank ended its long-standing quantitative easing policy on 9 March. The Japanese government bond futures market is pricing in about one interest rate hike by the BoJ in calendar year 2006; Japan’s current fiscal year ends on 31 March. The Nikkei 225 stock index gained 1.74% to close at ¥16,624.80. Dollar bids are cited around the ¥115.70 level. The euro came off vis-à-vis the yen as the single currency tested bids around the ¥141.20 level and was capped around the ¥141.90 level. The British pound and Swiss franc moved lower vis-à-vis the yen as the crosses tested bids around the ¥203.55 and ¥89.80 levels, respectively. The Chinese yuan depreciated vis-à-vis the U.S. dollar as the greenback closed at CNY 8.0309 in the over-the-counter market, up from CNY 8.0250, and at CNY 8.0277 in the exchange-traded market. The government reported it expects China’s Q1 CPI growth to be about 1.5% y/y. U.S. Senator Graham deemed recent movements in the yuan’s exchange rate “encouraging.” Graham and New York’s Schumer are visiting China to gain a better understanding of China’s currency policy amid threats to enact a 27.5% tariff on all Chinese imports.


The British pound extended recent losses vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.7460 level after running out of steam around the $1.7560 level. Some stops were reached below the $1.7470 level, representing the 61.8% retracement of the move from $1.7620 to $1.7230. Data released in the U.K. today saw February consumer price index gain 2.0% y/y, just above expectations for a +1.9% y/y climb and up from January’s and December’s 1.9% prints. Price pressures appear to be relatively benign at the moment and many traders believe the larger risk to the U.K. economy is a pullback in economic growth. Bank of England is forecasting GDP growth of 2.7% in 2006 and 3.1% in 2007. Chancellor of the Exchequer Brown’s annual Budget speech tomorrow will be closely watched for any clues about the deterioration in the U.K.’s public finances. Cable offers are cited around the US$ 1.7530 level. The euro moved higher vis-à-vis the British pound today as the single currency tested offers around the £0.6950 level and was supported around the £0.6915 level.


The Swiss franc depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.2985 level and was supported around the CHF 1.2905 level. Technically, the pair traded about ten pips above the 38.2% retracement of the move from CHF 1.2555 to CHF 1.3235. Data released in Switzerland today saw the February trade surplus print at CHF 906.2 million. Dollar bids are cited around the CHF 1.2895 level. The euro and British pound moved higher vis-à-vis the Swiss franc as the crosses tested offers around the CHF 1.5745 and CHF 2.2720 levels, respectively.


The Australian dollar came off vis-à-vis the U.S. dollar today as the Aussie tested bids around the US$ 0.7155 level after failing to get above the $0.7255 level. Today’s intraday low represents the pair’s weakest footing in some seventeen months and opens up the $ 0.7000 handle as a downside target. Australian dollar offers are cited around the US$ 0.7215 level.


The Canadian dollar extended its recent losses vis-à-vis the U.S. dollar today as the greenback tested offers around the C$ 1.1660 level and was supported around the C$ 1.1580 level. Technically, the pair continues to orbit around the 50% retracement of the move from C$ 1.1975 to $1.1300. January retail sales data will be released today in Canada. U.S. dollar offers are cited around the C$ 1.1715 level.


The New Zealand dollar continued its plunge vis-à-vis the U.S. dollar today as the kiwi tested bids around the US$ 0.6205 level and was unable to get above the $0.6275 level. The pair has not been this week since June 2004 and its inability to pierce the $0.6275 level, representing the 76.4% retracement of the move from $0.5910 to $0.7465, is bearish. New Zealand dollar offers are cited around the US$ 0.6315 level.

Gold/ Silver

Gold moved lower vis-à-vis the U.S. dollar today as the yellow metal tested bids around the US$ 548.40 level after failing to get above the $555.50 level. Germany’s Bundesbank reported it will not sell a substantial amount of gold from its foreign reserves over the next six months and this announcement was largely expected by the market. Fifteen European central banks agreed to limit their total gold sales to 2,5000 tones between 2004-2009. The $560 level has been toppish for the pair in recent weeks. Silver came off vis-à-vis the U.S. dollar and tested bids around the US$ 10.18 level after failing to get above the $10.35 level.

Crude oil

Crude oil moved briskly lower vis-à-vis the U.S. dollar today as light, sweet crude for May delivery tested bids around the US$ 61.57 level after testing offers around the $63.81 level. Traders continue to focus on oil relatively robust supplies in the U.S. and this is overshadowing events in hotspots like Iran and Nigeria. Crude supplies and stocks data will be released in the U.S. tomorrow.


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