NEWS / Macroeconomic Stories

Forex and Commodity Market Commentary and Analysis (21 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$ 1.2690 level and was supported around the US$ 1.2625 level. Today??™s high represents the pair??™s strongest print this week. The common currency was inspired by two days of testimony from Fed Chairman Bernanke who yesterday reiterated that the expected moderation in economic growth should cause inflation to decelerate. Inflation is clearly running above the Fed??™s perceived comfort zone by most measures and Bernanke??™s comment suggests the Federal Open Market Committee ??“ which next convenes on 8 August to deliberate policy ??“ is at or near the end of its tightening cycle. More and more economists are predicting the U.S. economy will undergo a recession later this year or early next year but the Fed has not indicated it shares these concerns. Minutes of the FOMC??™s meeting on 28-29 June were released and they were a bit on the dovish side. The long-awaited end to the FOMC??™s current tightening cycle will put the focus squarely on the European Central Bank. Most dealers expect the ECB to continue to raise rates this year, perhaps again in early August. Albeit the U.S. dollar will still derive benefit over the euro as far as interest rate differentials are concerned, a narrowing of official interest rates could see more demand for eurozone assets. Euro offers are cited around the US$ 1.2720/ 80 levels.

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The yen gained strong ground vis-? -vis the U.S. dollar today as the greenback tested bids around the ?? 115.80 level and was capped around the ??117.10 level. Technically, today??™s intraday low was right around the 23.6% retracement of the move from ??109.00 to ??117.85 and today??™s levels represent the week??™s lowest print. Bank of Japan Deputy Governor Muto reiterated the central bank will remove monetary policy accommodation slowly. Data released in Japan overnight saw the May all-industries index decline 0.2% m/m. The big catalyst for the stronger yen was a decision by People??™s Bank of China to tighten monetary policy. Speculation that this will precipitate a stronger Chinese yuan saw the yen gain strength. The Nikkei 225 stock index shed 0.84% to close at ??14,821.26. Dollar bids are cited around the ??115.15/ 114.50 levels. The euro weakened vis-? -vis the yen as the single currency tested bids around the ??146.85 level and was capped around the ??147.85 level. The British pound and Swiss franc moved lower vis-? -vis the yen as the crosses tested bids around the ??214.90 and ??93.50 levels, respectively. The Chinese yuan appreciated vis-? -vis the U.S. dollar as the greenback closed at CNY 7.9820 in the over-the-counter market, down from CNY 7.9920, and at CNY 7.9855 in the exchange-traded market. People??™s Bank of China lifted bank reserve requirements by 0.5% today in an attempt to restrain credit growth. Today??™s announcement comes exactly one year after the central bank revalued the yuan. Most traders anticipated some monetary tightening from PBOC after the Chinese economy was reported to have expanded some 11.3% y/y in Q2. This announcement also comes just a couple of months after PBOC raised its one-year benchmark lending rate to 5.85% from 5.58% in April. A government economist today called on China to expand the yuan??™s trading band but said China will require ???a managed exchange rate mechanism.???

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The British pound appreciated vis-? -vis the U.S. dollar today as cable tested offers around the US$ 1.8590 level and was supported around the $1.8465 level. Technically, today??™s intraday high was right around the 61.8% retracement of the move from $1.9550 to $1.7045. Sterling moved to weekly highs after it was reported U.K. economic growth registered a two-year high in Q2 on account of services sector growth, up 0.8% q/q and 2.6% y/y. This was an improvement over Q1??™s expansion of +0.7% q/q and 2.3% y/y. Today??™s data are consistent with the growth projections made by Bank of England as recently as May. Cable offers are cited around the US$ 1.8665/ 1.8805 levels. The euro moved lower vis-? -vis the British pound as the single currency tested bids around the ?‚¤0.6820 level and was capped around the ?‚¤0.6840 level.

CHF

The Swiss franc moved higher vis-? -vis the U.S. dollar today as the greenback tested bids around the CHF 1.2365 level and was capped around the CHF 1.2445 level. Chartists are eyeing the CHF 1.2335 and CHF 1.2255 levels as the pair??™s next downside targets. Dollar bids are cited around the CHF 1.2285 level. The euro moved lower vis-? -vis the Swiss franc as the single currency tested bids around the CHF 1.5690 level while the British pound moved higher vis-? -vis the Swiss franc and tested offers around the CHF 2.3020 level.

AUD

The Australian dollar appreciated vis-? -vis the U.S. dollar today as the Aussie tested offers around the US$ 0.7540 level and was supported around the US$ 0.7490 level. Technically, the pair continues to orbit the 38.2% retracement of the move from $0.6770 to $0.7985. Speculation is mounting that upcoming June inflation data will be strong enough to push Reserve Bank of Australia to tighten monetary policy further. Australian dollar offers are cited around the US$ 0.7615/ $0.7700 levels.


CAD

The Canadian dollar moved lower vis-? -vis the U.S. dollar today as the greenback tested offers around the C$ 1.1390 level and was supported around the C$ 1.1260 level. Data released in Canada today saw the headline consumer prices index rise 2.5% y/y in June, down from 2.8% y/y in May. On a monthly basis, the June CPI was off 0.2% m/m. Excluding energy prices, CPI was up 1.5% y/y in June, down from 1.8% in May. U.S. dollar offers are cited around the C$ 1.1615 level.

NZD

The New Zealand dollar appreciated vis-? -vis the U.S. dollar today as the kiwi tested offers around the US$ 0.6255 level and was supported around the US$ 0.6210 level. New Zealand dollar offers are cited around the US$ 0.6375 level.

Gold/ Silver

Gold appreciated vis-? -vis the U.S. dollar today as the yellow metal tested offers around the US$ 637.30 level and was supported around the $ 620.90 level. News that Israel called up military reservists kept the pair bid, as did the U.S. dollar??™s pullback. Silver moved higher vis-? -vis the U.S. dollar as the pair tested offers around the US$ 11.26 level and was supported around the $ 10.79 level.

Crude Oil

Crude oil moved higher vis-? -vis the U.S. dollar today as light, sweet NYMEX crude oil futures for September delivery tested offers around the US$ 74.84 level and was supported around the $73.90 level. Speculation that Israel is preparing for a ground invasion of Lebanon mounted after Israel is said to have called up army reservists. Traders are awaiting a response from Iran by 22 July to the West??™s package of incentives regarding suspension of Iran??™s nuclear ambitions. Market participants are also edgy ahead of the beginning of the U.S. hurricane season.