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Thursday May 11, 2006 - 14:27:42 GMT
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Forex and Commodity Market Commentary and Analysis (11 May 2006)

The euro came off vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.2685 level and was capped around the $1.2790 level. The common currency spiked above the $1.2800 figure after the Federal Open Market Committee’s interest rate decision was released yesterday, the first time the euro has traded above this level in exactly one year. The Federal Reserve lifted the federal funds target rate by +25bps to 5.00% as expected. In its statement, the FOMC reported “Economic growth has been quite strong so far this year. The Committee sees growth as likely to moderate to a more sustainable pace, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices. As yet, the run-up in the prices of energy and other commodities appears to have had only a modest effect on core inflation, ongoing productivity gains have helped to hold the growth of unit labor costs in check, and inflation expectations remain contained. Still, possible increases in resource utilization, in combination with the elevated prices of energy and other commodities, have the potential to add to inflation pressures. The Committee judges that some further policy firming may yet be needed to address inflation risks but emphasizes that the extent and timing of any such firming will depend importantly on the evolution of the economic outlook as implied by incoming information. In any event, the Committee will respond to changes in economic prospects as needed to support the attainment of its objectives.” Most traders walked away from the statement with the understanding the Fed could move again at the end of June, or pause then, as economic data dictate. Some doves believe yesterday’s move could represent the final move in the Fed’s current tightening cycle while others believe the FOMC will resume with the rate hikes again on 8 August. The bottom line is that the statement was perhaps a bit more hawkish than the markets anticipated and the U.S. dollar rallied. As a testatment to this, the federal funds futures market is pricing in about a 68% chance the fed funds rate will be 5.25% after the FOMC meeting on 8 August, up from a 56% chance before the Fed’s meeting. Data released in the U.S. today saw headline April retail sales climb +0.5% while the ex-autos component was up +0.7%, less-than-expected. Also, weekly initial jobless claims were off 1,000 to 324,000 and continuing jobless claims came in just under 2.4 million. March business inventories were up +0.7%. Tomorrow’s U.S. March trade deficit number could be a big one for the dollar with most economists looking for a print around –US$ 67 billion. In eurozone news, European Central Bank President Trichet said the central bank is on “alert” and “vigilant” about rising oil prices. Data released in the eurozone today saw provisional Q1 GDP up 0.6% q/q and up 2.0% y/y. Preliminary Q1 GDP was up 0.4% q/, below forecast. The ECB also noted economists surveyed by the ECB have lifted their EMU-12 inflation forecasts for 2006 and 2007. Euro offers are cited around the US$ 1.2890 level.

¥/ CNY

The yen weakened vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥111.50 level and was supported around the ¥110.40 level. Technically, the pair stopped just short of testing the 50% retracement of the move from ¥101.65 to ¥121.40. The U.S. Treasury’s refusal to name China a currency manipulator gave the greenback scope to appreciate vis-à-vis the yen as it means less overt pressure on China – and other Asian countries – to revalue their currencies. Data released in Japan overnight saw April bank lending up 1.2% y/y, the fastest pace in some ten years, while the April M2+CD money supply was up 1.7% y/y. Capital flows data released overnight saw foreign investors as net buyers of Japanese shares in the week to 6 May for the first time in two weeks. The April economy watchers’ survey will be released overnight. The Nikkei 225 stock index shed 0.53% to close at ¥16,862.14. Dollar bids are cited around the ¥109.60 level. The euro appreciated vis-à-vis the yen as the single currency tested offers around the ¥141.85 level and was supported around the ¥141.20 level. The British pound and Swiss franc moved higher vis-à-vis the yen as the crosses tested offers around the ¥208.00 and ¥91.05 levels, respectively. The Chinese yuan receded vis-à-vis the U.S. dollar as the greenback closed at CNY 8.0040 in the exchange-traded-market, up from CNY 8.0033. The big news yesterday was that the U.S. Treasury stopped short of labeling China a currency manipulator in its semi-annual foreign exchange report to Congress. Treasury Secretary Snow, however, said he is “extremely dissatisfied” with the pace of currency reform in China. Data released in China today saw April PPI up 1.9% y/y. People’s Bank of China called Ernst & Young’s report that estimates there to be some US$ 900 billion in non-performing loans in China “ridiculous, incomprehensible, and seriously distorted.”


The British pound rallied significantly vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.8735 level and was supported around the $ 1.8530 level. Technically, today’s intraday low was just below the 76.4% retracement of the move from $1.3680 to $1.9550. Data released in the U.K. today saw March manufacturing output up 0.7% m/m, its largest gain since April 2004. These data suggest the long-beleaguered U.K. manufacturing sector may be on the ascent and could positively contribute to final Q1 GDP. Cable offers are cited around the US$ 1.8960 level. The euro came off vis-à-vis the British pound as the single currency tested bids around the ₤0.6805 level and was capped around the ₤0.6870 level.


The Swiss franc weakened vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.2305 level and was supported around the CHF 1.2160 level. The April SECO consumer climate index will be released today. Dollar bids are cited around the CHF 1.2050 level. The euro and British pound moved higher vis-à-vis the Swiss franc as the pair tested offers around the CHF 1.5620 and CHF 2.2920 levels, respectively.


The Australian dollar gained marginal ground vis-à-vis the U.S. dollar today as the Aussie tested offers around the US$ 0.7760 level and was supported around the $0.7680 level. Data released in Australia today saw the April unemployment rate tick up to 5.1% from 5.0% in March. Australian dollar offers are cited around the US$ 0.7840 level.


The Canadian dollar weakened vis-à-vis the U.S. dollar today as the greenback tested offers around the C$ 1.1080 level and was supported around the C$ 1.1000 figure. March international trade data will be released tomorrow. U.S. dollar offers are cited around the C$ 1.1185 level.


The New Zealand dollar appreciated vis-à-vis the U.S. dollar today as the kiwi tested offers around the US$ 0.6330 level and was supported around the $0.6205 level. Technically, today’s intraday high was just below the 23.6% retracement of the move from $0.5990 to $0.6445 level. New Zealand dollar offers are cited around the US$ 0.6375 level.

Gold/ Silver

Gold made strong moves vis-à-vis the U.S. dollar today as the yellow metal tested offers around the US$ 726.05 level and was supported around the $702.55 level. The FOMC’s policy statement was more hawkish than expected yesterday and the ECB’s Trichet was hawkish in remarks made today. Both scenarios confirm policymakers are still concerned with inflation and pushed the pair to fresh 25-year highs. South African gold production was off 9.3% y/y in March. Silver moved higher vis-à-vis the U.S. dollar today as the pair tested offers around the 15.22 level and was supported around the $14.35 level.

Crude oil

Crude oil moved sharply higher vis-à-vis the U.S. dollar today as light, sweet NYMEX crude futures for June delivery tested offers around the US$ 73.89 level and were supported around the $71.98 level. News that a Texas refinery closed overshadowed inventories data released yesterday that saw crude supplies at eight-year highs with gasoline at level below a year-ago level. Also, the dispute between the world and Iran over the latter’s nuclear ambitions remains unresolved with most Security Council members having agreed to a delay in imposing sanctions.


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