NEWS / European Community

Forex and Commodity Market Commentary and Analysis (19 July 2006)

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The euro appreciated vis-? -vis the U.S. dollar today as the single currency tested offers around the US$ 1.2580 level and was supported around the $1.2460 level. The pair has not traded as low as today??™s intraday low since 27 April and chartists are eyeing the $1.2415 level as the pair??™s next downside target, followed by $1.2340. Data released in the U.S. today saw the June consumer price index print at +0.3% while the ex-food and energy core component was up +0.3%, hotter-than-expected. On an annualized basis, the headline rate was up 4.3% y/y while the core rate was up 2.6% y/y, above May??™s +2.4% y/y increase. These data saw the common currency spike to multi-month lows because they suggest inflation remains a problem for Fed policymakers. Fed Chairman Bernanke begins two days of congressional testimony today and indicated inflation is ???of concern.??? Bernanke also noted the economy needs a ???modest reduction in growth.??? His remarks caused the markets to reverse and the U.S. dollar moved into negative territory on the day. The fed funds futures markets reacted to today??™s CPI data by pricing in a 90% chance the Fed will lift interest rates by another +25bps on 8 August. After Bernanke??™s remarks were published, however, this slipped back to a 50% - 60% chance the Fed will lift the federal funds target rate in August. Fed policymakers are walking a delicate line between having to content with heightened inflation and not wanting to slow the economy too much. There has been clear recent evidence that the economy is decelerating, rendering the Fed??™s job very difficult. Other U.S. data released today saw June housing starts off 5.3% to 1.85 million. In eurozone news, the European Central Bank reported the eurozone??™s current account registered a deficit of -?‚¬15.2 billion in Q1. Also, German producer price inflation was up 0.3% m/m and 6.1% y/y. Euro offers are cited around the US$ 1.2650 level.

??/ CNY

The yen moved lower vis-? -vis the U.S. dollar today as the greenback tested offers around the ??117.85 level and was supported around the ??117.20 level. The pair has not traded this high since about 20 April of this year and chartists are eyeing the ??118.45 level as the pair??™s next upside target. The Japanese government kept its overall assessment of the economy unchanged this month, noting the economy is ???recovering.??? Notably, however, the government omitted the word ???deflation??? from its report, the first time it has done so since March 2001. A government spokesman said ???We can't declare a complete exit from deflation until we can ascertain that price increases are absolutely stable.??? Bank of Japan lifted the overnight call rate from 0% to 0.25% last week and most traders expect one more +25bps rate hike this year and perhaps another one by the end of the current fiscal year in March 2007. The Nikkei 225 stock index climbed 0.44% to close at ??14,500.26. Dollar bids are cited around the ??116.75 level. The euro moved higher vis-? -vis the yen as the single currency tested offers around the ??147.10 level and was supported around the ??146.30 level. The British pound moved higher vis-? -vis the yen as sterling tested offers around the ??215.15 level while the Swiss franc moved lower vis-? -vis the yen and tested bids around the ??93.40 level. The Chinese yuan weakened vis-? -vis the U.S. dollar as the greenback closed at CNY 8.0028 in over-the-counter trading, up from CNY 7.9982, and at CNY 8.0028 in the exchange-traded market.

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The British pound appreciated vis-? -vis the U.S. dollar today as cable tested offers around the US$ 1.8335 level and was supported around the $1.8230 level. Stops were reached above the $1.8310 level, representing the 23.6% retracement of the move from $1.9025 to $1.8090. Minutes from Bank of England??™s Monetary Policy Committee were released today and they evidenced a unanimous vote to keep the benchmark repo rate unchanged at 4.50% for the eleventh consecutive month. Notably, the MPC probably did not have any indication when they met that June inflation data were going to print at a lofty 2.5%. Many U.K. economic data will be released tomorrow including mortgage lending and retail sales. Cable offers are cited around the US$ 1.8445 level. The euro moved lower vis-? -vis the British pound as the single currency tested bids around the ?‚¤0.6830 level and was capped around the ?‚¤0.6850 level.

CHF

The Swiss franc moved higher vis-? -vis the U.S. dollar today as the greenback tested bids around the CHF 1.2475 level and was capped around the CHF 1.2595 level. The pair spiked sharply lower after prepared remarks from Fed Chairman Bernanke were released. U.S. dollar bids are cited around the CHF 1.2285 level. The euro and British pound moved higher vis-? -vis the Swiss franc as the crosses tested offers around the CHF 1.5700 and CHF 93.75 levels, respectively.

AUD

The Australian dollar moved higher vis-? -vis the U.S. dollar today as the Aussie tested offers around the US$ 0.7490 level and was supported around the US$ 0.7405 level. Data released in Australia today saw the May Westpac leading indicator up an annualized 4.2%, down from April??™s 4.7% annualized rate. Also, the July skilled job vacancies index fell 3.6% y/y and ANZ released a report that predicts Reserve Bank of Australia will maintain a tightening bias with regard to interest rates on account of economic growth. Australian dollar offers are cited around the US$ 0.7520 level.


CAD

The Canadian dollar moved higher vis-? -vis the U.S. dollar today as the greenback tested bids around the C$ 1.1325 level and was capped around the C$ 1.1405 level. June CPI data will be released in Canada on Friday. U.S. dollar offers are cited around the US$ 1.1615 level.

NZD

The New Zealand dollar moved lower vis-? -vis the U.S. dollar today as the kiwi tested bids around the US$ 0.6165 level and was capped around the US$ 0.6250 level. New Zealand dollar offers are cited around the US$ 0.6310 level.

Gold/ Silver

Gold moved higher vis-? -vis the U.S. dollar today as the yellow metal tested offers around the US$ 646.40 level and was supported around the $618.30 level. Remarks from Fed Chairman Bernanke were less hawkish than expected and this saw the pair move to intraday highs. Traders continue to monitor the military action involving Israel and Hezbollah. Silver moved higher vis-? -vis the U.S. dollar as the pair tested offers around the $11.00 figure and was supported around the $10.43 level.

Crude Oil

Crude oil moved lower vis-? -vis the U.S. dollar today as light, sweet NYMEX crude oil futures for September delivery tested bids around the US$ 74.56 level and was capped around the $75.86 level. News that Israel may end its major military action against Hezbollah in about a week saw the pair come off. Traders await the release of weekly U.S. inventories data today. Traders are also paying close attention to Iran??™s nuclear ambitions and there is no indication Tehran will suspend its nuclear ambitions despite significant international pressure.