NEWS / Foreign Debt

Forex and Commodity Market Commentary and Analysis (2 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$ 1.2790 level and was capped around the $ 1.2835 level. Today??™s intraday high represented the common currency??™s strongest print since 7 July and chartists are now eyeing the $1.2890 level as the pair??™s next upside target. Traders continue to reduce their long U.S. dollar exposure ahead of tomorrow??™s interest rate announcement from the European Central Bank and next week??™s interest rate decision from the Federal Reserve. Many traders expect the ECB to move its main refinancing rate higher by 25bps to 3.00% while many expect the Fed to either end its long-standing rate-tightening cycle with one final +25bps move on Tuesday or not move at all. Data released in the U.S. today saw the July ADP jobs report print at 99,000, just two days before the July U.S. non-farm payrolls report is released. Fed Chairman Bernanke recently indicated he believes a moderation in the U.S. economy will effect a pullback in inflationary pressures. Data that were released in the U.S. yesterday, however, saw the core personal consumption expenditure price index expand 2.4% y/y in June, its largest gain since April 2005. It was also reported that the headline July ISM manufacturing activity index improved to 54.7 from 53.8 in June, above expectations. In eurozone news, some dealers are not convinced the ECB will deliver another rate hike tomorrow. The September German Bund futures contract reached a six-week high today as dealers priced in the notion the ECB will adopt a somewhat softer tone on inflation tomorrow after raising rates. Data released in the eurozone yesterday saw the headline EMU-12 PMI manufacturing index slow to 57.4 from 57.7. Today??™s EMU-12 data saw June producer price inflation rise 0.2% m/m and 5.8% y/y. Euro offers are cited around the US$ 1.2890 level.

??/ CNY

The yen moved lower vis-? -vis the U.S. dollar today as the greenback tested offers around the ??114.90 level and was supported around the ??114.20 level. Technically, the pair continues to orbit the ??114.45 level, around the 38.2% retracement of the move from ??109.00 to ??117.85. A Bank of Japan report last night confirmed the central bank accelerated its absorption of surplus liquidity from the money market in July by lowering the balance of current account deposits at BoJ closer to the minimum required level. BoJ recently lifted the overnight call rate to 0.25% and many traders believe the central bank may lift the overnight federal funds target rate to 0.50% before the end of the year. BoJ Policy Board member Mizuno reiterated the central bank will lift borrowing costs at a ???slow??? pace but added it is wrong to think there will definitely be ???no more rate hike(s) this year.??? Regarding the Japanese economy, Mizuno added ???Should capital spending continue to rise, there would be a higher possibility of revising up our outlook for the economic growth rate towards the 2007 fiscal year.??? Data released in Japan overnight saw the July monetary base contract for the fifth consecutive month. The Nikkei 225 stock index climbed 0.15% to close at ??15,464.29. 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 ??146.50 level and was capped around the ??147.00 figure. The British pound moved higher vis-? -vis the yen as sterling tested offers around the ??215.35 level while the Swiss franc moved lower vis-? -vis the yen and tested bids around the ??214.35 level. The Chinese yuan appreciated vis-? -vis the U.S. dollar as the greenback closed at CNY 7.9713 in the over-the-counter market, down from CNY 7.9746, and at CNY 7.9681 in the exchange-traded market. The Chinese media is speculating People??™s Bank of China will begin to defend the yuan??™s exchange rate following a change to the way it sterilizes liquidity from the market by selling one-year bills. PBOC is concerned that more inflows into China will materialize when the Fed ends its long-standing rate-tightening cycle. One principal reason why China may be more willing to tolerate a stronger yuan is the threat of anti-Chinese protectionist legislation from U.S. Senators who believe China is not doing enough to liberalize its foreign exchange regime.

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The British pound appreciated vis-? -vis the U.S. dollar today as cable tested offers around the US$ 1.8790 level and was supported around the $1.8730 level. Today??™s intraday high was the pair??™s strongest print since 5 June and chartists are eyeing the $1.8805 level as the pair??™s next upside target. Data released in the U.K. today saw the July CIPS construction sector reach a three-month high last month. Also, Nationwide??™s main consumer confidence index was unchanged at 94 in July for the third consecutive month and down from a reading of 100 in July 2005. Most traders expect Bank of England??™s Monetary Policy Committee to keep its base repo rate unchanged at 4.50% tomorrow. Other data released today saw the BRC shop price index up 0.69% y/y, a two-year high. Cable offers are cited around the $1.8960 level. The euro moved lower vis-? -vis the British pound as the single currency tested bids around the ?‚¤0.6815 level and was capped around the ?‚¤0.6835 level.

CHF

The Swiss franc weakened vis-? -vis the U.S. dollar today as the greenback tested offers around the CHF 1.2295 level and was supported around the CHF 1.2255 level. Technically, the pair is orbiting the 50% retracement level of the move from CHF 1.1285 to CHF 1.3285. Data released in Switzerland today saw the July PMI survey print at a better-than-expected 65.1, a four-month high. Dollar bids are cited around the CHF 1.2050 level. The euro and British pound gained ground vis-? -vis the Swiss franc as the crosses tested offers around the CHF 1.5730 and CHF 2.3070 levels, respectively.

AUD

The Australian dollar came off vis-? -vis the U.S. dollar today as the Aussie tested bids around the US$ 0.7630 level and was capped around the $0.7680 level. As expected, Reserve Bank of Australia lifted its official cash rate by 25bps to 6.00%, the rate??™s highest level since 2000. Some traders believe RBA may not yet be finished with its monetary tightenings, especially if core inflation continues to increase. Data released today in Australia saw June retail sales rise 1.0% m/m. Australian dollar offers are cited around the US$ 0.7700 figure.

CAD

The Canadian dollar appreciated vis-? -vis the U.S. dollar today as the greenback tested bids around the C$ 1.1245 level and was capped around the C$ 1.1320 level. Technically, today??™s intraday low was just below the 38.2% retracement of the move from $1.0930 to $1.1455. June employment data will be released in Canada on Friday. U.S. dollar offers are cited around the C$ 1.1330 level.

NZD

The New Zealand dollar came off marginally vis-? -vis the U.S. dollar today as the kiwi tested bids around the US$ 0.6160 level and was capped around the $0.6215 level. New Zealand dollar offers are cited around the US$ 0.6275 level.

Gold/ Silver

Gold appreciated vis-? -vis the U.S. dollar today as the yellow metal tested offers around the US$ 656.04 level and was supported around the $ 645.50 level. News that Israel dispatched some 6,000 troops into southern Lebanon and Hezbollah launched an additional 70 rockets into Israel. In many traders??™ minds, the current situation risks spreading to other Arabic countries and there is no immediate chance that a cease fire may be reached. Silver moved higher vis-? -vis the U.S. dollar as the pair tested offers around the US$ 12.21 level and was supported around the $ 11.69 level.

Crude Oil

Crude oil appreciated vis-? -vis the U.S. dollar today as light, sweet NYMEX crude oil futures for September delivery tested offers around the US$ 79.15 level and was supported around the $ 75.04 level. Escalating tensions between Israel and Hezbollah and speculation that Iran will not comply with a United Nations deadline of 31 August to end its uranium enrichment activities have the pair bid. Traders await the release of weekly U.S. energy inventories data today.