NEWS / Fiscal Policy, Budget

Forex and Commodity Market Commentary and Analysis (1 August 2006)

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The euro came off vis-? -vis the U.S. dollar today as the single currency tested bids around the US$ 1.2720 level and was capped around the $1.2770 level. Technically, today??™s intraday high was just below the 61.8% retracement of the move from $1.3480 to $1.1640. Traders are talking about comments made by Federal Reserve officials yesterday that indicate next week??™s Federal Open Market Committee interest rate decision will be a very close call. St. Louis Fed President Poole noted the need for a rate hike next week is ???50-50??? while San Francisco Fed President Yellen suggested the current federal funds target rate of 5.25% is ???in the vicinity??? of the correct level. Pooled reported recent data have had some ???negative??? aspects and noted these include that ???have tended to tilt in the direction of greater pressures than we had previously thought.??? Yesterday??™s Chicago PMI survey came in strong and today??™s U.S. economic data include June personal income and spending, June personal consumption expenditures, June construction spending, and the July ISM manufacturing survey. Traders are very interested to see where the July ISM prices paid index prints as the inflation data released in conjunction with preliminary Q2 U.S. GDP data on Friday were on the high side. Dealers also await the release of July non-farm payrolls data this Friday. In eurozone news, most dealers believe the European Central Bank will lift its main refinancing rate to 3.00% on Thursday. Euro offers are cited around the US$ 1.2775/ 1.2890 levels.

??/ CNY

The yen was mostly unchanged vis-? -vis the U.S. dollar today as the greenback tested offers around the ??114.80 level and was supported around the ??114.50 level. Technically, today??™s intraday low was around the 38.2% retracement of the move from ??135.15 to ??101.65. A Nikkei poll estimates Japan??™s economy expanded 0.4% q/q in the April ??“ June quarter from the three months to March, or at an annualized pace of 1.7%. Preliminary GDP data will be released on 11 August and the markets also expect the GDP deflator to print at a negative level for the April ??“ June period with the domestic demand deflator coming in on the plus side. The Nikkei 225 stock index shed 0.10% to close at ??15,440.91. Dollar bids are cited around the ??113.85 level. The euro moved lower vis-? -vis the yen as the single currency tested bids around the ??145.90 level and was capped around the ??146.40 level. The British pound and Swiss franc receded vis-? -vis the yen as the crosses tested bids around the ??213.55 and ??92.80 levels, respectively. In Chinese news, the July PMI survey printed at 52.4, down from 54.1 in June. Traders await remarks from U.S. Treasury Secretary Paulson later in the day about the Chinese yuan. Both the new orders index and export orders index fell.

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The British pound came off vis-? -vis the U.S. dollar today as cable tested bids around the US$ 1.8625 level and was capped around the $1.8680 level. Chartists are eyeing the $1.8595 level as the pair??™s next downside target with more demand expected around the $1.8535 level. U.K. July Nationwide house prices and consumer confidence are expected to be released today. Cable offers are cited around the US$ 1.8805 level. The euro moved lower vis-? -vis the British pound as the single currency tested bids around the ?‚¤0.6825 level and was capped around the ?‚¤0.6840 level.

CHF

The Swiss franc came off vis-? -vis the U.S. dollar today as the greenback tested offers around the CHF 1.2365 level and was supported around the CHF 1.2300 figure. This week??™s intraweek low for the pair is right around the 50% retracement of the move from CHF 1.1285 to CHF 1.3285. The Swiss July PMI survey will be released tomorrow followed by July consumer price inflation data on Thursday. U.S. dollar bids are cited around the CHF 1.2290 level. The euro and British pound moved higher vis-? -vis the Swiss franc as the crosses tested offers around the CHF 1.5735 and CHF 2.3035 levels, respectively.

AUD

The Australian dollar depreciated vis-? -vis the U.S. dollar today as the Aussie tested bids around the US$ 0.7615 level and was capped around the $0.7665 level. Technically, today??™s intraday low was right around the 61.8% retracement of the move from $0.7985 to $0.7015. Data released in Australia today saw the July AIG performance of manufacturing index fall 4.8 index points to 49.7 while June total building approvals were up 1.6% m/m. Most traders believe Reserve Bank of Australia will lift its base interest rate to 6.00% tomorrow and the markets believe there is a 75% chance rates will be lifted another 25bps to 6.25% thereafter. Inflation data released last week saw annual headline consumer price inflation rise to 4.0% y/y in the June quarter. In other Australian news, Treasurer Costello named Reserve Bank of Australia Deputy Governor Stevens to replace retiring Governor Macfarlane. Australian dollar offers are cited around the US$ 0.7700 figure.


CAD

The Canadian dollar moved marginally lower vis-? -vis the U.S. dollar today as the greenback tested offers around the C$ 1.1320 level and was supported around the C$ 1.1295 level. This week??™s intraweek high was right below the 23.6% retracement of the move from $1.0925 to $1.1455 level. July employment data and the July Ivey PMI survey will be released on Friday. U.S. dollar offers are cited around the C$ 1.1355/ 1.1615 levels.

NZD

The New Zealand dollar came off vis-? -vis the U.S. dollar today as the kiwi tested bids around the $0.6155 level and was capped around the $0.6195 level. Chartists are eyeing the $0.6125 level as the pair??™s next downside target. New Zealand dollar offers are cited around the $0.6245 level.

Gold/ Silver

Gold came off vis-? -vis the U.S. dollar today as the yellow metal tested bids around the US$ 631.90 level and was capped around the $637.80 level. News that Israel restarted its military offensive against Hezbollah targets in southern Lebanon has the markets on edge as there is no indication Israel is ready to relent. Silver moved lower vis-? -vis the U.S. dollar as the pair tested bids around the $11.32 level and was capped around the $11.43 level.

Crude Oil

Crude oil moved marginally lower vis-? -vis the U.S. dollar today as light, sweet NYMEX crude oil futures for September delivery tested bids around the US$ 74.35 level and was capped around the $ 74.79 level. News that a leak occurred in Russia??™s largest oil pipeline to Europe saw oil move higher yesterday and traders remain concerned over supply disruptions in Nigeria. Continued Middle East tensions remain problematic for oil traders who continue to bid the pair higher, especially on the news that Israel will broaden its offensive until an international peacekeeping force deploys in southern Lebanon. U.S. Secretary of State Rice has noted a cease-fire may be reached this week. Oil is about 21% this year.