NEWS / Foreign Debt

Forex and Commodity Market Commentary and Analysis (27 July 2006)

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The euro moved higher vis-? -vis the U.S. dollar today as the single currency tested offers around the US$ 1.2750 level and was supported around the $1.2705 level. Technically, today??™s intraday low was right around the 61.8% retracement of the move from $1.2860 to $1.2460. The dollar has been pressured ever since the Federal Reserve??™s Beige Book was released yesterday and increased speculation the Federal Open Market Committee will not raise interest rates on 8 August. The Fed noted U.S. growth is moderating in many regions and added wage pressures remain benign. The fed funds futures market is currently pricing in about a 57% chance the FOMC will lift the federal funds target rate by +25bps in a couple of weeks. Data released in the U.S. today saw June headline durable goods orders print at 3.1% while the ex-transportation component came in at +1.0%. Also, weekly initial jobless claims came of 12,000 to 298,000. Traders await the release of tomorrow??™s Q2 GDP report with most forecasts looking for a pullback in annual growth to 3.1% from Q1??™s torrid 5.6% pace. Additionally, new U.S. home sales were off some 3% to an annualized 1.131 million rate, the first decline since February, and were off 11.1% y/y. In eurozone news, Germany??™s GfK August consumer climate index is expected to improve to 8.6 from a revised 8.0 in July. Notably, however, the German Ifo business climate index fell to 105.5 this month from 106.8 in June, below forecasts. Despite this pullback in corporate sentiment, most dealers expect European Central Bank to lift interest rates next week. Euro offers are cited around the US$ 1.2775/ 1.2890 levels.

??/ CNY

The yen appreciated sharply vis-? -vis the U.S. dollar today as the greenback tested bids around the ??115.45 level and was capped around the ??116.40 level. Stops were reached below the 23.6% retracement of the move from ??109.00 to ??117.85. Economic and fiscal policy minister Yosano warned Bank of Japan to be ???very careful??? about raising interest rates too much and added there is ???no friction??? between the government and central bank. Finance minister Tanigaki today announced his candidacy for the premiership with Prime Minister Koizumi leaving office in September. Tanigaki today indicated Japan will need to lift its 5% consumption tax to ???at least 10%??? by the mid-2010s. The yen gained some ground after threats of U.S. protectionist legislation emerged in Congress related to the inflexibility of Chinese??™s foreign exchange regime; Senators Graham and Schumer are threatening a vote on steep tariffs by 30 September. The yen gained as a result at it is often seen as a proxy for the yuan. Capital flows released today saw foreign investors as net buyers of Japanese equities for the first time in two weeks while Japanese investors were net sellers of foreign equities. The Nikkei 225 stock index climbed 1.99% to close at ??15,179.78. Dollar bids are cited around the ??115.80/ ??116.75 levels. The euro moved lower vis-? -vis the yen today as the single currency tested bids around the ??147.20 level and was capped around the ??148.05 level. The British pound and Swiss franc weakened vis-? -vis the yen as the crosses tested bids around the ??215.00 and ??93.40 levels, respectively. The Chinese yuan appreciated vis-? -vis the U.S. dollar as the greenback closed at CNY 7.9748 in the over-the-counter market, down from CNY 7.9874, and at CNY 7.9750 in the exchange-traded market. Ratings agency Standard & Poors lifted its sovereign rating of China to A from A- and said its outlook is stable. People??™s Bank of China Policy Board member Yu Yongding will end his term this month and this is notable as he is the only non-government member on the committee and has called for accelerated yuan revaluation.

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The British pound extended recent gains vis-? -vis the U.S. dollar today as cable tested offers around the US$ 1.8640 level and was supported around the $1.8530 level. Technically, today??™s intraday low was right around the 76.4% retracement of the move from $2.0035 to $1.3690. Data released in the U.K. today saw June BBA mortgage approvals climb 5.6% m/m. Many traders continue to speculate Bank of England??™s Monetary Policy Committee will tighten monetary policy in August or September. Cable offers are cited around the US$ 1.8960 level. The euro moved lower vis-? -vis the British pound as the single currency tested bids around the ?‚¤0.6835 level and was capped around the ?‚¤0.6865 level.

CHF

The Swiss franc moved higher vis-? -vis the U.S. dollar today as the greenback tested bids around the CHF 1.2340 level and was capped around the CHF 1.2415 level. Technically, today??™s intraday high was just below the 38.2% retracement of the move from $1.4270 to $1.1285. The July KOF leading indicator will be released tomorrow. The Swiss franc continues to benefit from some safe-haven flows related to the current military skirmish in the Middle East. Dollar bids are cited around the CHF 1.2285/ 1.2050 levels. The euro and British pound depreciated vis-? -vis the Swiss franc as the crosses tested bids around the CHF 1.5735 and CHF 2.2975 levels, respectively.

AUD

The Australian dollar moved higher vis-? -vis the U.S. dollar today as the Aussie tested offers around the US$ 0.7645 level and was supported around the $0.7600 figure. Traders continue to bid the pair higher following yesterday??™s strong Australian CPI data and most market participants believe Reserve Bank of Australian will be forced to tighten monetary policy further. Australian dollar offers are cited around the US$ 0.7700 figure.
CAD

The Canadian dollar moved higher vis-? -vis the U.S. dollar today as the greenback tested bids around the C$ 1.1285 level and was capped around the C$ 1.1365 level. Technically, today??™s intraday high was right around the 61.8% retracement of the move from $1.1771 to $1.0925. June industrial product prices and June raw materials prices data will be released tomorrow. U.S. dollar offers are cited around the US$ 1.1572 level.

NZD

The New Zealand dollar weakened vis-? -vis the U.S. dollar today as the kiwi tested bids around the US$ 0.6175 level and was capped around the $ 0.6255 level. As expected, Reserve Bank of Australia decided to leave interest rates unchanged at 7.25%. RBA Governor Bollard reported ???While second-round wage and price effects remain a risk, we do not expect to have to tighten the OCR further in this cycle. Indicators of both consumer demand and business activity have not softened to the degree anticipated. We are also seeing slightly more short-term inflation pressure as a result of the continued upward trend in world oil prices. We remain wary of the risks to inflation expectations presented by these high headline inflation rates. A sustained period of adjustment in domestic spending is necessary, and it will be some time before an easing in the OCR can be considered.??? New Zealand dollar offers are cited around the US$ 0.6275/ 0.6375 levels.

Gold/ Silver

Gold moved higher vis-? -vis the U.S. dollar today as the yellow metal tested offers around the US$ 640.64 level and was supported around the $ 622.30 level. The pullback in the U.S. dollar following yesterday??™s dovish Fed Beige Book released contributed to gold??™s gains. Continuing tensions in the Middle East also added to the pair??™s gains and with no viable cessation in military action in sight, gold may remain on the offensive. Silver moved higher vis-? -vis the U.S. dollar as the pair tested offers around the US$ 11.47 level and was supported around the $ 11.07 level.

Crude Oil

Crude oil gained ground vis-? -vis the U.S. dollar today as light, sweet NYMEX crude oil futures for September delivery tested offers around the US$ 74.75 level and were supported around the $73.77 level. Traders bid crude oil higher yesterday after weekly U.S. inventories data evidenced a larger-than-expected 3.2 million barrel decline in gasoline stocks. Continued fighting in Nigeria and the Middle East continue to contribute to price volatility.