NEWS / Fiscal Policy, Budget

Forex and Commodity Market Commentary and Analysis (25 July 2006)

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The euro moved marginally higher vis-? -vis the U.S. dollar today as the single currency tested offers around the US$ 1.2670 level and was supported around the $1.2605 level. Technically, the pair continues to orbit the 50% retracement of the move from $1.3665 to $1.1640. Data released in the eurozone today saw German June import prices decline 0.2% m/m in June and climb 5.6% y/y and were up 3.6% y/y ex-oil. It was also reported that the EMU-12 current account moved back into deficit in May, printing at -?‚¬8.2 billion, up from a revised surplus of ?‚¬9.0 billion in April. Compared with the U.S. massive current account and trade deficits, the eurozone??™s current account balance is relatively benign. On an annualized basis, the total current account balance for the twelve months to May was -?‚¬47.6 billion. Also, the French business climate indicator rose to 109 in July from 107 in June. Traders await the release of Germany??™s Ifo survey of business confidence tomorrow. In U.S. news, data to be released today include the July consumer confidence index, June existing home sales, and the Richmond Fed manufacturing index. There continues to be some inertia in the markets as traders contemplate the likelihood of additional interest rate hikes from the Federal Reserve. According to the fed funds futures market, about 50% of traders expect the Federal Open Market Committee to lift the federal funds target rate by +25bps on 8 August. Remarks from Fed officials and economic data releases will likely dictate movements in the market and traders will also begin to focus on the August meeting of the European Central Bank. Euro offers are cited around the US$ 1.2775 level.

??/ CNY

The yen was little-changed vis-? -vis the U.S. dollar today as the greenback tested offers around the ??116.95 level and was supported around the ??116.50 level. Today??™s range was relatively narrow and was attributable to a lack of Japanese economic data. Technically, the pair continues to orbit the 23.6% retracement level of the move from ??101.65 to ??121.40. Also, today??™s intraday high was just above the 50% retracement of the move from ??117.85 to ??115.80. The June corporate services price index will be released tonight along with the June merchandise trade balance. The Nikkei 225 stock index climbed 1.42% to close at ??15,005.24. Dollar bids are cited around the ??116.20/ 115.65 levels. The euro moved higher vis-? -vis the yen as the single currency tested offers around the ??147.75 level and was supported around the ??147.30 level. The British pound and Swiss franc moved higher vis-? -vis the yen as the crosses tested offers around the ??216.20 and ??93.85 levels, respectively. The Chinese yuan moved lower vis-? -vis the U.S. dollar today as the greenback closed at CNY 7.9871 in the exchange-traded market, up from CNY 7.9841. Traders are talking about a government report that suggests China should accelerate the diversification of its foreign exchange reserves that now officially total some US$ 941 billion. China??™s Communist Party today reiterated ???In order to safeguard the fundamental interests of the Chinese people, China needs to maintain the stability of the currency and financial market and, at the same time, guard against inflation.???

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The British pound lost marginal ground vis-? -vis the U.S. dollar today as cable tested bids around the US$ 1.8445 level and was capped around the $ 1.8535 level. Technically, today??™s intraday high was right around the 76.4% retracement of the move from $2.0035 to $1.3680. The big focus on traders??™ minds now is whether or not Bank of England??™s Monetary Policy Committee will tighten interest rates next month. The headline repo rate has remained unchanged since August 2005 but inflationary pressures may dictate rate hike. The July CBI industrial trends survey will be released in the U.K. tomorrow. Cable offers are cited around the US$ 1.8595 level. The euro moved higher vis-? -vis the British pound as the single currency tested offers around the ?‚¤0.6840 level and was supported around the ?‚¤0.6825 level.

CHF

The Swiss franc gained marginal ground vis-? -vis the U.S. dollar today as the greenback tested bids around the CHF 1.2420 level and was capped around the CHF 1.2485 level. The June UBS consumption indicator was released today and printed at 2.11, up from 1.87 in May ??“ a five-year high. Dollar bids are cited around the CHF 1.2285 level. The euro was little-changed vis-? -vis the Swiss franc as the single currency tested offers around the CHF 1.5750 level while the British pound tested bids around the CHF 2.3015 level and was capped around the CHF 2.3065 level.

AUD

The Australian dollar moved higher vis-? -vis the U.S. dollar today as the Aussie tested offers around the US$ 0.7565 level and was supported around the $0.7525 level. Technically, today??™s intraday low was right around the 38.2% retracement of the move from $0.6770 to $0.7985. Australian dollar offers are cited around the US$ 0.7592 level.

CAD

The Canadian dollar gained marginal ground vis-? -vis the U.S. dollar today as the greenback tested bids around the C$ 1.1375 level and was capped around the C$ 1.1430 level. June industrial product prices data and the June raw materials price index will be released on Friday. U.S. dollar offers are cited around the US$ 1.1615 level.

NZD

The New Zealand dollar moved higher vis-? -vis the U.S. dollar today as the kiwi tested offers around the US$ 0.6275 level and was supported around the $0.6225 level. Technically, today??™s intraday high was right around the 76.4% retracement of the move from $0.5910 to $0.7465. New Zealand dollar offers are cited around the US$ 0.6290 level.

Gold/ Silver

Gold moved higher vis-? -vis the U.S. dollar today as the yellow metal tested offers around the US$ 624.05 level and was supported around the $ 613.25 level. Continued fighting in the Middle East where Israel and Hezbollah are exchanging military offensives has the pair bid but it is off from recent highs. U.S. Secretary of State Rice is in the Middle East but many traders are skeptical of her diplomacy. Silver moved higher vis-? -vis the U.S. dollar as the pair tested offers around the US$11.01 level and was supported around the $10.88 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$ 75.68 level and were supported around the $75.03 level. News that a large Venezuelan gasoline supplier will be closed for up to eight months saw the pair move higher as the refinery is a top supplier of gasoline to the U.S. Traders also reacted to diminishing expectations for a diplomatic solution to Middle East tensions and news that Chinese oil demand continues to surge are keeping the pair bid.