NEWS / Central Banks

Forex and Commodity Market Commentary and Analysis (26 July 2006)

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The euro gained marginal ground vis-? -vis the U.S. dollar today as the single currency tested offers around the US$ 1.2595 level and was supported around the $1.2560 level. Technically, today??™s intraday low was right around the 50% retracement of the move from $1.3480 to $1.1640. The common currency was given yesterday after the release of U.S. economic data that saw an improvement in consumer confidence in July and June existing home sales decline 1.3%, less-than-expected. The Richmond Fed manufacturing index was also strong and the markets reacted to these data by pricing in a greater chance the Federal Open Market Committee will lift interest rates by +25bps on 8 August; the fed funds market now sees about a 60% chance the FOMC will tighten policy in a couple of weeks to 5.50%. The Fed Beige Book will be released today. In eurozone news, German consumer prices appreciated 0.4% m/m and 1.9% y/y. On a harmonized basis, prices were up 0.5% m/m and 2.1% y/y. uro offers are cited around the $1.2650.

??/ CNY

The yen moved higher vis-? -vis the U.S. dollar today as the greenback tested bids around the ??116.65 level and was capped around the ??117.25 level. Technically, today??™s intraday low was just above the 38.2% retracement of the move from ??117.85 to ??115.80. Bank of Japan Policy Board member Suda today reiterated the central bank should only tighten monetary policy gradually. Most traders believe the central bank may lift the overnight call rate to 0.50% by the end of the year and to around 0.75% by the end of the current fiscal year in March 2007. A government official was quoted as saying ???The BoJ wants to confirm a downward revision to the CPI data in late August. If the downward bias is up to 0.3 percentage point, as expected, the current 0.6 pct year-on-year rise in the core CPI will be reduced to 0.3 pct. But with another rate hike, the overnight rate rises to 0.5 pct, which will be higher than expected CPI gains, and as a result, real interest rates will turn positive. CPI gains, and as a result, real interest rates will turn positive. The government expects the BoJ to hike rates only once more to 0.5 pct by year-end, or even by the end of March. There is no need to raise the overnight rate to 0.75 pct during this period.??? BoJ lifted the overnight call rate to 0.25% from near zero per cent on 14 July. Data released in Japan overnight saw the June corporate services price index rise 0.2% m/m while the June trade surplus was off 5.9% to ?? 807.87 billion. The Nikkei 225 stock lost 0.81% to close at ??14,884.07. Dollar bids are cited around the ??116.20 level. The euro moved lower vis-? -vis the yen as the single currency tested bids around the ??146.80 level and was capped around the ??147.45 level. The British pound and Swiss franc depreciated vis-? -vis the yen as the crosses tested bids around the ??214.65 and ??93.15 levels, respectively. The Chinese yuan appreciated vis-? -vis the U.S. dollar as the greenback closed at CNY 7.9860 in the exchange-traded market, down from CNY 7.9871. A government economist said a 5% annual appreciation in the yuan would be ???appropriate.??? The National Development and Reform Commission said the economy may decelerate from its 10.9% growth rate in H1.

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The British pound gained marginal ground vis-? -vis the U.S. dollar today as cable tested offers around the US$ 1.8425 level and was supported around the $1.8390 level. Today??™s range was limited after the pair gave back significant ground yesterday, having encountered offers around the 76.4% retracement of the move from $2.0035 to $1.3680. The July CBI industrial trends survey will be released today. Cable offers are cited around the US$ 1.8535 level. The euro was little-changed 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 moved lower vis-? -vis the U.S. dollar today as the greenback tested bids around the CHF 1.2505 level and was capped around the CHF 1.2540 level. Technically, the pair yesterday traded above the 38.2% retracement of the move from CHF 1.1285 to CHF 1.3285. The July KOF leading indicator will be released on Friday. Some safe-haven buying of the Swiss franc is evident and is attributable to the continuing fighting in the Middle East. U.S. dollar offers are cited around the CHF 1.2685 level. The euro and British pound came off vis-? -vis the Swiss franc as the crosses tested bids around the CHF 1.5740 and CHF 2.3015 levels, respectively.

AUD

The Australian dollar appreciated vis-? -vis the U.S. dollar today as the Aussie tested offers around the US$ 0.7590 level and was supported around the $ 0.7525 level. Technically, today??™s intraday high was right around the 61.8% retracement of the move from $0.7790 to $0.7270. Data released in Australia today saw June consumer price inflation climb 1.6% q/q and 4.0% y/y. These data were hotter-than-expected and were above Q1??™s rise of +0.9% q/q and 3.0% y/y. Most traders now expect Reserve Bank of Australia to raised interest rates by 25bps to 6.00% on Wednesday. Finance minister Costello warned that a rate hike ???won??™t do anything??? to control imported inflation. RBA last raised rates in May, lifting the cash rate by 25bps to 5.75%. Australian dollar offers are cited around the US$ 0.7615/ 0.7670 levels.

CAD

The Canadian dollar moved higher vis-? -vis the U.S. dollar today as the greenback tested bids around the C$ 1.1350 level and was capped around the $1.1430 level. Technically, today??™s intraday low was right around the 23.6% retracement of the move from $1.2730 to $1.0925. U.S. dollar offers are cited around the C$ 1.1450 level.

NZD

The New Zealand dollar moved higher vis-? -vis the U.S. dollar today as the kiwi tested offers around the US$ 0.6260 level and was supported around the $0.6215 level. Chartists are eyeing the $0.6290 level as the pair??™s next upside target. Data released in New Zealand today saw the June trade balance print at ??“NZ$ 214 million, better-than-expected, and the 2006 trade deficit now stands at ??“NZ$ 6.63 billion. New Zealand dollar offers are cited around the US$ 0.6280 level.

Gold/ Silver

Gold lost ground vis-? -vis the U.S. dollar today as the yellow metal tested bids around the US$ 614.35 level and was capped around the $ 619.95 level. The pair continues to trade sideways as traders ponder the outcome of the current Middle East tensions. Silver moved lower vis-? -vis the U.S. dollar as the pair tested bids around the $10.82 level and was capped around the $10.98 level.

Crude Oil

Crude oil gained marginal ground vis-? -vis the U.S. dollar today as light, sweet NYMEX crude oil futures tested offers around the US$ 74.07 level and was supported around the $73.57 level. Traders await the release of weekly U.S. crude and gasoline stocks. Also, traders are waiting to see if a meeting in Rome today will result in a cessation of Middle East violence. The pair has pulled back from historical highs around $78.40 level that printed a couple of weeks ago. Traders continue to react to news that Venezuela??™s Amuay refinery will be closed for two months due to a fire.