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Tuesday August 10, 2004 - 18:43:32 GMT
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Forex Market Commentary and Analysis (10 August 2004)



The euro gained ground vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.2320 level after being in a relatively confined range since Friday’s non-farm payrolls data. The Federal Open Market Committee convened today and voted to raise the federal funds target rate by 25bps to 1.50%. The Fed’s statement read “The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. In recent months, output growth has moderated and the pace of improvement in labor market conditions has slowed. This softness likely owes importantly to the substantial rise in energy prices. The economy nevertheless appears poised to resume a stronger pace of expansion going forward. Inflation has been somewhat elevated this year, though a portion of the rise in prices seems to reflect transitory factors. The Committee perceives the upside and downside risks to the attainment of both sustainable growth and price stability for the next few quarters are roughly equal. With underlying inflation still expected to be relatively low, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.” Data released in the U.S. today saw Redbook same-store retail sales off 0.5% for the week ending 7 August. Also, Q2 non-farm productivity was released today and it came in at +2.9%, down from last quarter’s 3.9% rate. Q2 unit labour costs were reported at +1.9% from a downwardly revised +0.3% last quarter. These productivity data were a little stronger-than-forecast but are unlikely to have a major impact on the economy as traders are clearly focused on U.S. jobs creation in the run-up to the November presidential election. If traders have noticed a general lack of activity in the markets, they are not alone. Implied options volatilities are at 52-week lows for one-month options, an indication that traders do not anticipate much spot volatility in the next month or so. Data released in the eurozone today saw Ifo German economic sentiment improve to 96.6 in July from April with both future expectations and current conditions sub-indices improving. Other data released today saw Germany’s trade surplus come in stronger-than-expected in June, escalating to € 14.7 billion from € 14.1 billion in May. Also, German wholesale prices increased 0.2% in July with the annualized rate climbing to 3.9% from 3.5%, its highest level since December 2000. This increase, however, is largely being dismissed by economists as a statistical anomaly and it should not have a major impact on ECB economic policymaking. French manufacturing data evidenced a continued expansion in June with +0.4% m/m and +3.3% y/y gains. DIW today released a forecast that predicts the German economy will expand +0.5% q/q in Q2 with a deceleration to +0.4% in the current Q3. Euro bids are cited around the $1.2250 level.

¥

The yen lost some additional ground vis-à-vis the U.S. dollar today as the greenback tested offers right around the ¥111.00 figure but was capped by technical resistance around that level. The pair briefly tested bids around the ¥110.40 level during Australasian dealing before moving higher to test the technically-significant ¥110.80 level. Bank of Japan’s Policy Board opted to keep monetary policy unchanged overnight and will continue to target a current account surplus of ¥30-35 trillion. Also, BoJ maintained its overall assessment of the economy in its August monthly report – saying the economy “continues to recover” - and cautioned against rising crude oil prices and their effect on the economy. BoJ Governor Fukui today said he expects consumer prices will continue to decline and added a change in CPI alone will not effect a change in monetary policy. Most BoJ-watchers believe the central bank will not begin to take back its quantitative easing until after the current fiscal year ends in Japan in March 2005. The Nikkei 225 stock index closed 0.41% higher to close at ¥10,953.55. Dollar offers are cited around the ¥111.10 level. The euro gained significant ground vis-à-vis the yen today as the single currency tested offers around the ¥136.50 level and was supported around the ¥135.55 level. Euro bids are seen around the ¥135.80/ 65 levels.

£

The British pound retraced some of its losses vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.8340 level after running into offers around the $1.8420 level during Australasian dealing. Sterling came off on account of a decline in U.K. consumer price inflation that saw retail inflation off 0.3% m/m last month – its largest monthly fall since January – while the annual rate decelerated from +1.6% to +1.4%, suggesting a decrease in price pressures. These data are consistent with Bank of England’s expectations and traders await tomorrow’s August BoE quarterly inflation report. Other data released today saw the U.K. June global goods trade deficit at £4.97 billion compared with £4.82 billion in May. Other data released today saw U.K. retail sales ease more in July, slowing to +1.8% from 2.4% in June. On the M&A front, there is renewed talk that Citigroup is looking to acquire the venerable U.K. bank Barclays but this is not having a major impact on the markets yet. The euro gained ground vis-à-vis the British pound today as the single currency tested offers around the £0.6705 level after and was supported around the £0.6660 level.

CHF

The Swiss franc was largely unchanged vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.2495 level and tested offers around the CHF 1.2550 level. Swiss National Bank added one-week liquidity at 0.26% today, unchanged from yesterday’s repo operation. Technical dollar offers are seen around the CHF 1.2550 level and dollar bids are cited around the CHF 1.2470 level. The euro climbed higher vis-à-vis the Swiss franc today as the single currency tested offers around the CHF 1.5420 level and tested bids around the CHF 1.5370 level.

 

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