NEWS / Indicators

Forex and Commodity Market Commentary and Analysis (3 August 2006)

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The euro appreciated vis-? -vis the U.S. dollar today as the single currency tested offers around the US$ 1.2830 level and was supported around the $1.2740 level. Technically, today??™s intraday low was right around the 23.6% retracement of the move from $1.2460 to $1.2835. As expected, European Central Bank lifted its main refinancing rate by +25bps to 3.00% and ECB President Trichet was moderately hawkish in his post-announcement remarks. Trichet noted the central bank will monitor inflationary risks ???very closely??? and noted ???If our assumptions and baseline scenario are confirmed, a progressive withdrawal of monetary accommodation will be warranted.??? Traders are now focusing on October as the month when borrowing costs are likely to be increased next. Data released in the eurozone today saw the EMU-12 PMI services survey fall to 57.9 in July from 60.7 in June, consistent with this week??™s data that saw the PMI manufacturing sector slow from a six-year peak. Also, it was reported that EMU-12 retail sales climbed 0.5% m/m and 1.5% y/y in June. In U.S. news, weekly initial jobless claims rose 14,000 to 315,000 while continuing jobless claims rose 11,000 to 2.480 million. The ISM non-manufacturing survey printed at 54.8, down from 57.0 in June but the 40th consecutive monthly expansion in the services sector. All eyes will be on tomorrow??™s July U.S. non-farm payrolls report, the best indicator of job creation in the U.S. economy. Following that, the markets will focus more closely on next week??™s Federal Open Market Committee meeting. Most traders believe the Fed is likely to lift the federal funds target rate by +25bps although some dealers believe the Fed may hold its fire and either pause or end its rate tightening cycle. Recent inflation data have been fairly hot thus it may be difficult for the Fed to sit on its heels at this meeting. Euro offers are cited around the US$ 1.2855 level.

??/ CNY

The yen weakened vis-? -vis the U.S. dollar today as the greenback tested offers around the ??115.15 level and was supported around the ??114.55 level. Today??™s range was relatively tight and technically, today??™s intraday low was right around the 38.2% retracement of the move from ??135.15 to ??101.65. July official reserves data will be released in Japan tonight. The Nikkei 225 stock index climbed 0.04% to close at ??15,470.37. Dollar bids are cited around the ??113.85 level. The euro moved higher vis-? -vis the yen as the single currency tested offers around the ??147.35 level and was supported around the ??146.20 level. The British pound and Swiss franc moved higher vis-? -vis the yen as the crosses tested offers around the ??217.30 and ??93.55 levels, respectively. The Chinese yuan moved lower vis-? -vis the U.S. dollar as the greenback closed at CNY 7.9768 in the over-the-counter market, up from CNY 7.9713, and at CNY 7.9572 in the exchange-traded market. Government economist Xia Bin suggested China should allocate 20% to 30% of its foreign reserves to be actively managed. A National Development and Reform Commission official suggested ???We hope the yuan exchange rate can float in a wider range than the current 0.3 pct on either side of the central parity rate, allowing the yuan to appreciate slowly. This will help increase the cost of speculation.??? Chinese news agency Xinhua quoted a People??™s Bank of China report that indicates the central bank will ???enhance its analysis and monitoring (of monetary conditions) and adopt comprehensive measures to control monetary and credit growth in order to promote sustained, stable and balanced economic development.???

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The British pound soared higher vis-? -vis the U.S. dollar today as cable tested offers around the US$ 1.8915 level and was supported around the $ 1.8700 figure. Surprisingly, Bank of England??™s Monetary Policy Committee lifted the headline repo rate by +25bps to 4.75%, its first change in interest rates since August 2005. The markets had discounted about a 30% chance the MPC would tighten rates today thus this caught most of the market off-guard. Stops were hit above the $1.8805 level, representing the 76.4% retracement of the move from $1.9025 to $1.8090. BoE reported ???The pace of economic activity has quickened in the past few months. Household spending appears to have recovered from its post-Christmas dip. Business investment growth and investment intentions have also picked up. In the United Kingdom 's main export markets growth has remained robust. As a result, over the past few quarters GDP growth has been at, or a little above, its long-run average and business surveys point to continued firm growth. The margin of spare capacity in the economy appears small. CPI inflation picked up to 2.5% in June, and is expected to remain above the 2.0% target for some while. Higher energy prices have led to greater inflationary pressures, notwithstanding muted earnings growth and a squeeze on profit margins. Although the path of energy prices is extremely uncertain, energy price inflation is expected to moderate in the medium term. But some recovery in profit margins and pay growth is likely to mean that consumer price inflation will move only gradually back to the target. Against the background of firm growth, limited spare capacity, rapid growth of broad money and credit, and with inflation likely to remain above the target for some while??¦??? BoE??™s MPC will release its quarterly inflation report on 9 August and minutes of today??™s MPC meeting will be released on 16 August. Data released in the U.K. today saw Halifax July house prices climb 0.2% m/m and 8.8% y/y while the U.K. services sector survey printed below expectations. Cable offers are cited around the US$ 1.8955 level. The euro weakened vis-? -vis the British pound as the single currency tested bids around the ?‚¤0.6770 level and was capped around the ?‚¤0.6820 level.
CHF

The Swiss franc gained marginal ground vis-? -vis the U.S. dollar today as the greenback tested offers around the CHF 1.2355 level and was supported around the CHF 1.2265 level. Technically, today??™s intraday low was just above the 50% retracement of the move from CHF 1.1920 to CHF 1.2595. Data released in Switzerland today saw July CPI fall 0.7% m/m and climb 1.4% y/y. Dollar bids are cited around the CHF 1.2180 level. The euro and British pound moved higher vis-? -vis the Swiss franc as the crosses tested offers around the CHF 1.5755 and CHF 2.3250 levels, respectively.

AUD

The Australian dollar moved lower vis-? -vis the U.S. dollar today as the Aussie tested bids around the US$ 0.7585 level and was capped around the US$ 0.7650 level. The NAB June quarterly business confidence index fell to +8 from +13 in the March quarter while the AIG performance of services index receded 2.2 points to 50.4. Australian Prime Minister Howard today refuted suggestions the Australian economy may fall into recession on account of this week??™s interest rate hike by Reserve Bank of Australia. Australian dollar offers are cited around the US$ 0.7695 level.

CAD

The Canadian dollar gained marginal ground vis-? -vis the U.S. dollar today as the greenback tested bids around the C$ 1.1225 level and was capped around the C$ 1.1275 level. Technically, the pair continues to orbit the C$ 1.1255 level, the 38.2% retracement of the move from C$ 1.0925 to C$ 1.1455. July employment data will be released tomorrow. U.S. dollar offers are cited around the C$ 1.1330 level.

NZD

The New Zealand dollar weakened vis-? -vis the U.S. dollar today as kiwi tested bids around the US$ 0.6180 level and was capped around the $ 0.6235 level. Technically, today??™s intraday high was just above the 23.6% retracement of the move from $0.7195 to $0.5925. New Zealand dollar offers are cited around the US$ 0.6410 level.

Gold/ Silver

Gold slumped vis-? -vis the U.S. dollar today as the yellow metal tested bids around the US$ 642.40 level and was capped around the $ 652.80 level. News that tropical storm Chris weakened saw the pair give back some recent gains. Israel pounded targets around Beirut today and there does not appear to be any possibility of a cessation in the fighting for now. Silver came off vis-? -vis the U.S. dollar as the pair tested bids around the US$ 12.01 level and was capped around the $ 12.21 level.

Crude Oil

Crude oil moved lower vis-? -vis the U.S. dollar today as light, sweet NYMEX crude oil futures for September delivery tested bids around the US$ 74.70 level and was capped around the $ 76.14 level. News that tropical storm Chris will not have a significant impact on oil production facilities in the Gulf of Mexico saw the pair cede recent gains. Inventories data released yesterday saw gasoline stocks fall 100,000 barrels last week, smaller-than-expected. Traders continue to fret that the violence in the Middle East will spill over to Syria and Iran.