NEWS / Central Banks

Forex and Commodity Market Commentary and Analysis (4 August 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$ 1.2875 level and was supported around the $ 1.2775 level. Technically, today??™s intraday low was right around the 61.8% retracement of the move from $1.2980 to $1.2460. The big story of the data was the release of U.S. July non-farm payrolls that saw 113,000 new jobs created last month with a cumulative upward revision of +11,000 jobs to May??™s and June??™s tallies. The July number was less than the 150,000 news jobs expected and the unemployment rate printed at 4.8%, up from 4.6%. Average hourly earnings expanded +0.4$% m/m and 3.8% y/y. Prior to the number, the federal funds futures market was pricing in about a 46% chance the Federal Open Market Committee would lift the fed funds target rate by +25bps next Tuesday and after the number, that likelihood fell to 20%. In eurozone news, Germany manufacturing orders declined 0.5% m/m in June, below expectations of a +1.4% climb. European Central Bank Governing Council member Quaden was quoted as saying it is possible for the ECB to control inflation and promote economic growth at the same time. The ECB lifted the its main refinancing rate to 3.00% yesterday and remarks from ECB President Trichet were somewhat hawkish. Traders, however, noted that Trichet did not use the word ???vigilant??? in his remarks and now believe the ECB will raise rates in October and December, pushing the main refinancing rate up to 3.50%. Euro offers are cited around the US$ 1.2855 level.

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The yen appreciated vis-? -vis the U.S. dollar today as the greenback tested bids around the ??114.55 level and was capped around the ??115.55 level. Technically, today??™s intraday high is just below the 38.2% retracement of the move from ??117.85 to ??114.15. The Nikkei reported the government will maintain its overall economic assessment unchanged this month and report the economy is ???recovering??? for the sixth consecutive month. In short order, the markets will begin to focus on the end of Prime Minister Koizumi??™s term in office and will focus on the nomination of his successor, more than likely to be Chief Cabinet Secretary Shinzo Abe. The Nikkei 225 stock index climbed 0.19% to close at ??15,499.18. Dollar bids are cited around the ??115.04/ ??114.40 levels. The euro moved higher vis-? -vis the yen as the single currency tested offers around the ??147.70 level and was supported around the ??147.15 level. The British pound and Swiss franc moved higher vis-? -vis the yen as the crosses tested offers around the ??218.50 and ??93.60 levels, respectively. The Chinese yuan weakened vis-? -vis the U.S. dollar as the greenback closed at CNY 7.9784 in the over-the-counter market, down from CNY 7.9768, and at CNY 7.9773 in the exchange-traded market. People??™s Bank of China Vice Governor Wu Xiaoling was quoted as saying the yuan??™s exchange rate will ???increasingly reflect market forces??? and added companies will need to need to use more financial derivatives to control foreign exchange risk. Data released in China today saw H1 retail sales climb 13.3% y/y at CNY 3.6 trillion. The government also reported the economy is likely to expand some 10% in 2006 with fixed-asset investment up some 25%.

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The British pound moved higher vis-? -vis the U.S. dollar today as cable tested offers around the US$ 1.9010 level and was supported around the $ 1.8850 level. Today??™s intraday high is the pair??™s strongest print since 19 May of this year and yesterday??™s strong gains were attributable to the somewhat surprising rate hike announced bu Bank of England??™s Monetary Policy Committee. Data released in the U.K. today saw CML mortgage repossessions at a five-year high in H1 2006 while individual insolvencies in England and Wales reached a record high in Q2. Cable offers are cited around the US$ 1.8955 level. The euro moved lower vis-? -vis the British pound as the single currency tested bids around the ?‚¤0.6755 level and was capped around the ?‚¤0.6785 level.

CHF

The Swiss franc appreciated vis-? -vis the U.S. dollar today as the greenback tested bids around the CHF 1.2250 level and was capped around the CHF 1.2345 level. Technically, the pair continues to orbit the 38.2% retracement of the move from CHF 1.1920 to CHF 1.2595. The Middle Eastern conflict is not having a major impact on the Swiss franc at this time. Dollar bids are cited around the CHF 1.2255/ 1.2175 levels. The euro moved higher vis-? -vis the Swiss franc as the single currency tested offers around the CHF 1.5785 level and was supported around the CHF 1.5750 level. The British pound moved higher vis-? -vis the Swiss franc as the pair tested offers around the CHF 2.3355 level and was supported around the CHF 2.3215 level.

AUD

The Australian dollar came off marginally vis-? -vis the U.S. dollar today as the Aussie tested bids around the US$ 0.7585 level and was capped around the US$ 0.7625 level. Reserve Bank of Australia released its quarterly statement on monetary policy overnight wherein it lifted its forecast for underlying annual inflation to 3.0% from the forecast of 2.75% in May. Some traders are speculating the RBA will next raise interest rates in early November and many dealers believe the Australian dollar will continue to appreciate, especially if commodity prices remain bullish. Australian dollar offers are cited around the US$ 0.7670 level.

CAD

The Canadian dollar weakened vis-? -vis the U.S. dollar today as the greenback tested offers around the C$ 1.1340 level and was supported around the C$ 1.1230 level. Technically, today??™s intraday high was just above the 23.6% retracement of the move from C$ 1.0925 to C$ 1.1455. Data released in Canada today saw July payrolls fall by 5,500, the second consecutive month of employment decline, while the unemployment rate moved to 6.4% from 6.1% in June. Many traders believe these data will pressure Bank of Canada to not raise borrowing costs for the foreseeable future. U.S. dollar offers are cited around the US$ 1.1355/ 1.1450 levels.

NZD

The New Zealand dollar was little-changed vis-? -vis the U.S. dollar today as the kiwi tested bids around the US$ 0.6175 level and tested offers around the US$ 0.6205 level. Technically, the $0.6225 level represents the 23.6% retracement of the move from $0.7195 to $0.5925. New Zealand dollar offers are cited around the US$ 0.6275 level.

Gold/ Silver

Gold gained ground vis-? -vis the U.S. dollar today as the yellow metal tested offers around the US$ 648.03 level and was supported around the $ 643.50 level. The pair reacted to today??™s U.S. July non-farm payrolls data and the range could be limited ahead of Tuesday??™s Federal Open Market Committee meeting. Support is being derived from the ongoing conflict in the Middle East between Israel and Hezbollah, now in its third week. Israel bombed three highway bridges north of Beirut today. Silver moved higher vis-? -vis the U.S. dollar as the pair tested offers around the US$ 12.26 level and was supported around the $ 12.04 level.

Crude Oil

Crude oil weakened vis-? -vis the U.S. dollar today as light, sweet NYMEX crude oil futures for September delivery tested bids around the US$ 75.16 level and was supported around the $ 75.70 level. Traders are carefully monitoring the Middle East conflict to make sure it does not spillover into Syria or Iran. News that Iran may not suspend its uranium enrichment activities by the end of the month has upside risk priced into oil this month. Ongoing militant activities in Nigeria are also of concern to traders and speculation that the U.S. hurricane season will be another difficult one has market participants keeping a close eye on the Gulf of Mexico.