NEWS / Trade Policy

Forex and Commodity Market Commentary and Analysis (12 July 2006)

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The euro spun lower vis-? -vis the U.S. dollar today as the single currency tested bids around the US$ 1.2685 level and was capped around the $1.2775 level. Technically, today??™s intraday high was right around the 61.8% retracement of the move from $1.3480 to $1.1640. Data released in the U.S. today saw the May trade deficit print less-than-expected at ??“US$ 63.8 billion but this was up from April??™s level of ??“US$ 63.3 billion. Notably, the U.S.??™s trade deficit with China expanded 4% to US$ 17.7 billion while the trade deficit with Japan was reduced by 8.5% to US$ 7.1 billion. Traders now await the release of the Treasury International Capital data to see if international portfolio inflows financed the U.S.??™s massive trade deficit two months ago. In eurozone news, it was reported that EMU-12 economic growth was +0.6% q/q but the European Commission surprisingly reduced its growth forecast for Q2 to +0.4% - +0.8% and for Q3 to +0.3% - +0.7%. The European Commission also warned eurozone countries that their failure to reduce deficits could endanger the EMU-12 economic recovery. European Central Bank policymaker Hurley reiterated upside price pressures have caused the ECB to indicate it will remain vigilant on inflation. ECB??™s monthly report will be released tomorrow along with consumer price inflation data. Euro offers are cited around the US$ 1.2775/ 1.2890 levels.

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The yen lost significant ground vis-? -vis the U.S. dollar today as the greenback tested offers around the ??115.50 level and was supported around the ??114.15 level. Technically, today??™s intraday high was right around the 50% retracement of the move from ??116.70 to ??113.45. Bank of Japan is widely expected to lift interest rates from near zero per cent later this week but speculation that it may not lift rates as much as expected led to yen weakness overnight. Some traders see the benchmark overnight rate going to +0.25% but others believe pressure from the government and continued deflation concerns will limit BoJ??™s ability to raise rates. A move higher in rates this week would mark the first such move in some six years. Finance minister Tanigaki reiterated now is not the time for the central bank to raise rates. Data released in Japan today saw the June corporate goods price index off 0.1% m/m, the first decline in twelve months. The Nikkei 225 stock index shed 1.45% to close at ??15,249.32. Dollar bids are cited around the ??114.70/ ??113.75 levels. The euro moved higher vis-? -vis the yen as the single currency tested offers around the ??146.70 level and was supported around the ??145.75 level. The British pound and Swiss franc came off vis-? -vis the yen as the crosses tested bids around the ??210.65 and ??93.05 levels, respectively. The Chinese yuan depreciated vis-? -vis the U.S. dollar as the greenback closed at CNY 7.9917 in the over-the-counter market, up from CNY 7.9911, and at CNY 7.9910 in the exchange-traded market. A report in China Securities Journal today concludes People??™s Bank of China has had little success in slowing the economy through macroeconomic controls and added interest rate policy will need to be utilized more thoroughly.

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The British pound depreciated vis-? -vis the U.S. dollar today as cable tested bids around the US$ 1.8330 level and was capped around the $1.8480 level. Chartists are eyeing the $1.8310 level as the pair??™s next downside target. Data released in the U.K. today saw the June claimant count improve 5,900 to 956,600, the highest level since January 2002 and the fifth consecutive monthly increase. Also, headline average earnings rose 4.1% y/y in the three months to May. Bank of England released its semi-annual Financial Stability Review today and noted some risks to the U.K.??™s financial system have increased since December. Cable offers are cited around the US$ 1.8445 level. The euro was little-changed vis-? -vis the British pound as the single currency tested offers around the ?‚¤0.6925 level and was supported around the ?‚¤0.6895 level.

CHF

The Swiss franc moved lower vis-? -vis the U.S. dollar today as the greenback tested offers around the CHF 1.2355 level and was supported around the CHF 1.2245 level. Chartists are eyeing the CHF 1.2385 level as the pair??™s next upside target and technically, today??™s intraday high was right around the 50% retracement of the move from CHF 1.2525 to CHF 1.2185. Data released in Switzerland today saw the number of Swiss bankruptcies increase 0.4% in H1. The Swiss franc could benefit if tensions continue to mount in the Middle East, particularly as more Israeli soliders were kidnapped. Dollar bids are cited around the CHF 1.2295/ 25 levels. The euro and British pound moved higher vis-? -vis the Swiss franc as the crosses tested offers around the CHF 1.5680 and CHF 2.2695 levels, respectively.

AUD

The Australian dollar moved lower vis-? -vis the U.S. dollar today as the greenback tested bids around the US$ 0.7515 level and was capped around the $0.7555 level. Technically, the pair continues to orbit the 38.2% retracement of the move from $0.6770 to $0.7985 level. Data released in Australia today saw the Westpac July consumer confidence index rise 3.5% to 107.4. Australian dollar offers are cited around the US$ 0.7615 level.

CAD

The Canadian dollar moved lower vis-? -vis the U.S. dollar today as the greenback tested offers around the C$ 1.1375 level and was supported around the $1.1310 level. Stops were triggered above the C$ 1.1350 level, representing the 50% retracement of the move from C$ 1.1775 to C$ 1.0925. Data released in Canada today saw its May trade surplus expand less-than-expected to C$ 4.07 billion from a revised C$ 3.88 billion in April. U.S. dollar offers are cited around the C$ 1.1450 level.

NZD

The New Zealand dollar moved lower vis-? -vis the U.S. dollar today as the kiwi tested bids around the US$ 0.6135 level and was capped around the US$ 0.6190 level. Finance minister Cullen today said the New Zealand economy will achieve a soft landing but the government is forecasting the economy is expected to grow a mere 1.1% in the year to March 2006, down from the long-term growth rate of 3.5%. New Zealand dollar offers are cited around the US$ 0.6180/ 0.6235 levels.

Gold/ Silver

Gold moved higher vis-? -vis the U.S. dollar today as the yellow metal tested offers around the US$ 651.42 level and was supported around the $640.00 figure. Firm oil prices and yesterday??™s terrorist attacks in India have kept the pair bid. Silver moved higher vis-? -vis the U.S. dollar as the pair tested offers around the US$ 11.74 level and was supported around the $11.46 level.

Crude Oil

Crude oil moved higher vis-? -vis the U.S. dollar today as light, sweet NYMEX crude oil futures for August delivery tested offers around the US$ 74.53 level and was supported around the $73.99 level. Prices are firm because traders expect today??™s weekly U.S. inventories data to evidence robust demand for energy. News of additional tensions in the Middle East between Israel and Hezbollah and skittishness following yesterday??™s terrorist attacks in Mumbai have kept the pair on the offensive. The IAEA today predicted the world will require 1.57 million barrels per day more to service economic growth in 2007, up from 1.21 million barrels per day in 2006. Tough talk about Iran at this weekend??™s Group of Eight meeting in St. Petersburg could keep the pair bid.