NEWS / Macroeconomic Stories

Forex and Commodity Market Commentary and Analysis (7 July 2006)

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The euro rocketed higher vis-? -vis the U.S. dollar today as the single currency tested offers around the US$ 1.2860 level and was supported around the $ 1.2765 level. Technically, today??™s intraday high was around the 76.4% retracement of the move from $1.2980 to $1.2480. Two main factors caused the dollar to spiral downward. First, traders continue to react to the hawkish remarks made by European Central Bank President Trichet yesterday. Trichet noted the central bank will continue to exercise ???strong vigilance??? in managing inflation pressures and many dealers believe the ECB will next lift rates on 3 August. Notably, the ECB will meet in person rather by teleconference as originally planned next month and Trichet confirmed a news conference has been scheduled whereas it was previously not scheduled. Traders are speculating this is more proof the ECB plans to hike rates next month. ECB??™s Trichet and Noyer speak publicly this weekend. The second factor that pressured the U.S. dollar today was news that June non-farm U.S. payrolls gained 121,000, far below expectations, while the unemployment rate remained unchanged at 4.6%. In contrast to the soft job gains number, average hourly earnings climbed a hotter-than-expected 0.5%. Overall, however, today??™s data perhaps validates the Federal Reserve??™s policy statement last week that suggested inflationary pressures should be tempered by moderating economic growth. The federal funds futures market immediately reacted by lowering expectations for an 8 August interest rate hike. Traders now see about a 58% chance that Fed policymakers will lift the federal funds target rate by +25bps next month. Fed Governor Kohn spoke last night and said ?????¦an unmooring of the anchor of price stability could only elevate the odds on abrupt changes in interest rates and asset prices, instability in the US economy, and disorder in global adjustments.??? In other eurozone news, German industrial output was up 1.5% m/m. Euro offers are cited around the US$ 1.2890 level.

??/ CNY

The yen appreciated sharply vis-? -vis the U.S. dollar today as the greenback tested bids around the ??113.80 level and was capped around the ??115.25 level. Technically, today??™s intraday high was right around the 38.2% retracement of the move from ??109.00 to ??116.70. The dollar moved lower after traders speculated the Japanese government will lift its GDP forecast for the current fiscal year to 2.1% from 1.9%. Traders moved into yen on the premise that Bank of Japan will be more inclined to raise interest rates from near zero per cent next week when Policy Board members convene. Data released in Japan today saw June foreign exchange reserves rise to a record US$ 864.88 billion. The Nikkei 225 stock index shed 0.09% to close at ??15,307.61. Dollar bids are cited around the ??112.85 level. The euro moved lower vis-? -vis the yen as the single currency tested bids around the ??146.20 level and was capped around the ??147.25 level. The British pound and Swiss franc moved lower vis-? -vis the yen as the crosses tested bids around the ??210.85 and ??93.25 levels, respectively. The Chinese yuan appreciated sharply vis-? -vis the U.S. dollar as the greenback closed at CNY 7.9859 in the over-the-counter market, down from CNY 7.9925, and at CNY 7.9866 in the exchange-traded market. A market rumour that People??™s Bank of China called an emergency policy board meeting to discuss interest rates saw the yuan make sharp gains. Data released in China today saw June consumer confidence fall to 94.1 from 94.2 in March.

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The British pound moved sharply higher vis-? -vis the U.S. dollar today as cable tested offers around the US$ 1.8535 level and was supported around the $1.8355 level. Technically, today??™s intraday high was right around the 76.4% retracement of the move from $2.0035 to $1.3680. Sterling was also bid before the U.S. non-farm payrolls data were released on speculation that Morgan Stanley Chief U.K. economist David Miles ??“ a purported monetary hawk ??“ may join Bank of England??™s Monetary Policy Committee. Cable offers are cited around the US$ 1.8595 level. The euro came off vis-? -vis the British pound as the single currency tested bids around the ?‚¤0.6925 level and was capped around the ?‚¤0.6960 level.

CHF

The Swiss franc appreciated vis-? -vis the U.S. dollar today as the greenback tested bids around the CHF 1.2185 level and was capped around the CHF 1.2295 level. Technically, today??™s intraday high was around the 50% retracement of the move from CHF 1.1285 to CHF 1.3285. Data released in Switzerland today saw the June unemployment rate recede to 3.1% from 3.3% in May. Dollar bids are cited around the CHF 1.2050 level. The euro moved lower vis-? -vis the Swiss franc as the single currency tested bids around the CHF 1.5660 level while the British pound moved higher vis-? -vis the Swiss franc and tested offers around the CHF 2.2625 level.

AUD

The Australian dollar moved higher vis-? -vis the U.S. dollar today as the Aussie tested offers around the US$ 0.7520 level and was supported around the $0.7450 level. Technically, today??™s intraday high was right around the 38.2% retracement of the move from $0.6770 to $0.7985. Australian dollar offers are cited around the US$ 0.7615 level.


CAD

The Canadian dollar gained marginal ground vis-? -vis the U.S. dollar today as the greenback tested bids around the C$1.1085 level and was capped around the $1.1150 level. U.S. dollar offers are cited around the $1.1250 level.

NZD

The New Zealand dollar gained ground vis-? -vis the U.S. dollar today as the kiwi tested offers around the US$ 0.6115 level and was supported around the $0.6035 level. New Zealand dollar offers are cited around the US$ 0.6180 level.

Gold/ Silver

Gold slumped vis-? -vis the U.S. dollar today as the yellow metal tested bids around the US$ 628.70 level and was capped around the $ 637.50 level. Silver moved lower vis-? -vis the U.S. dollar as the pair tested bids around the $11.32 level and was capped around the $11.61 level.

Crude Oil

Crude oil appreciated vis-? -vis the U.S. dollar today as light, sweet NYMEX crude futures for August delivery tested offers around the US$ 75.65 level and was supported around the $74.65 level. On an inflation-adjusted basis, this represents the pair??™s strongest print since the 1980 Iran-Iraq war. More militant attacks in Nigeria also caused the pair to move higher.