NEWS / Trade Policy

Forex and Commodity Market Commentary and Analysis (7 August 2006)

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The euro gave back marginal gains vis-? -vis the U.S. dollar today as the single currency tested bids around the US$ 1.2845 level and was capped around the $1.2890 level. On Friday, the common currency reached its highest level since 6 June and the move higher followed weaker-than-expected July non-farm payrolls data that called into question the likelihood of additional monetary tightening from the Federal Open Market Committee tomorrow. As of Friday, the fed funds futures market was pricing in account a 16% chance the Fed would lift interest rates by +25bps tomorrow and the markets expect the target rate to be about 5.33% by the end of the year. If the Fed pauses tomorrow, it means the Fed will have tightened seventeen consecutive times during the current rate-tightening cycle before pausing. Traders are already speculating the FOMC will move once more by the end of the year, possibly at the December FOMC meeting. The big number in the U.S. this week will be Thursday??™s trade data with most forecasts focusing in on a trade balance of ??“US$ 64.5 billion, wider than May??™s US$ 63.8 billion print. Friday??™s retail sales data will also provide a yardstick for the health of the U.S. consumer. In eurozone news, European Central Bank member Bini Smaghi this weekend said ?????¦after the increase decided last Thursday, you can't deny that the current level -- 3 pct -- represents a still very accommodative monetary policy, given that nominal yields is rising at more than 4 pct. For this reason, it ought to be expected that the process of aligning interest rates continues in the next months. The pace will depend on developments in the European economy.??? ECB??™s Liebscher also indicated ???a further withdrawal of what is still an accommodating monetary policy is naturally required.??? Euro offers are cited around the US$ 1.2890 level.

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The yen weakened vis-? -vis the U.S. dollar today as the greenback tested offers around the ??115.05 level and was supported around the ??114.15 level. Stops were reached above the ??114.90 level, representing the 23.6% retracement of the move from ??117.85 to ??113.95. Data released in Japan today saw the country??™s foreign exchange reserves print at US$ 871.94 billion at the end of July, up from the June??™s level and the fifth consecutive month a new record high was reached. By comparison, China officially has some US$ 941.1 billion in foreign reserves. Other data released in Japan today saw the index of leading economic indicators recede to 50.0 from 77.3 in May while the coincident index improved to 88.9 in June from 80.0 in May and the lagging index fell to 75.0 in June from 80.0 in May. Most traders do not believe Bank of Japan??™s Policy Board will tighten interest rates at this week??™s meeting and most dealers believe the central bank will lift borrowing costs another +25bps by the end of 2006. The Nikkei 225 stock index shed 2.23% to close at ??15,154.06. Dollar bids are cited around the ??115.75 level. The euro moved higher vis-? -vis the yen as the single currency tested offers around the ??147.90 level and was supported around the ??147.05 level. The British pound and Swiss franc gained ground vis-? -vis the yen as the crosses tested offers around the ??219.55 and ??94.05 levels, respectively. The Chinese yuan appreciated vis-? -vis the U.S. dollar as the greenback closed at CNY 7.9689 in the over-the-counter market, down from CNY 7.9784, and at CNY 7.9687 in the exchange-traded market.

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The British pound gained marginal ground vis-? -vis the U.S. dollar today as cable tested offers around the US$ 1.9105 level and was supported around the $ 1.9040 level. On Friday, cable reached its strongest level since April and chartists are eyeing the $1.9215 and $1.9325 levels as the pair??™s next upside targets. Data released in the U.K. today saw June industrial production decline 0.1% m/m while manufacturing production was up 0.1%. BCC reported the U.K. economy is likely to expand about 2.6% this year, more than originally planned. Last week, Bank of England??™s Monetary Policy Committee surprisingly lifted interest rates and traders are curious to see if this is a one-off move or the beginning of a prolonged tightening cycle. Cable bids are cited around the US$ 1.8905 level. The euro moved lower vis-? -vis the British pound as the single currency tested bids around the ?‚¤0.6735 level and was capped around the ?‚¤0.6755 level.

CHF

The Swiss franc gained marginal ground vis-? -vis the U.S. dollar today as the greenback tested bids around the CHF 1.2205 level and was capped around the CHF 1.2235 level. Technically, the CHF 1.2185/ 75 level has been supporting the pair since 8 June and dealers are curious to see if this level can be pierced. Data released in Switzerland today saw July unemployment remain unchanged at 3.1%. Dollar offers are cited around the CHF 1.2345 level. The euro and British pound moved lower vis-? -vis the Swiss franc as the crosses tested bids around the CHF 1.5710 and CHF 2.3275 levels, respectively.

AUD

The Australian dollar came off 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 high was right around the 61.8% retracement of the move from $0.7985 to $0.7015. Data released in Australia today saw July ANZ job advertisements up 1.8% m/m and 24.5% y/y. Australian dollar bids are cited around the US$ 0.7590/ 30 levels.
CAD

The Canadian dollar moved higher vis-? -vis the U.S. dollar today as the greenback tested bids around the C$ 1.1195 level and was capped around the C$ 1.1280 level. June building permits and housing starts data will be released tomorrow and Wednesday, respectively. U.S. dollar offers are cited around the C$ 1.1255/ 1.1330 levels.

NZD

The New Zealand dollar depreciated vis-? -vis the U.S. dollar today as the kiwi tested bids around the US$ 0.6225 level and was capped around the $ 0.6275 level. Technically, today??™s intraday high was right around the 76.4% retracement of the move from $0.5910 to $0.7465. New Zealand dollar offers are cited around the US$ 0.6410 level.

Gold/ Silver

Gold rallied vis-? -vis the U.S. dollar today as the yellow metal tested offers around the US$ 651.19 level and was supported around the $ 644.30 level. Firming prices in the energy markets and the belief the Federal Open Market Committee will not tighten interest rates tomorrow contributed to the pair??™s gains. Silver moved higher vis-? -vis the U.S. dollar as the pair tested offers around the $12.50 level and was supported around the $12.30 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$ 76.69 level and was supported around the $ 74.60 level. News that British Petroleum is shutting production at an Alaskan oil field that produces some 8% of U.S. crude caused the pair to move higher. Traders also continue to bid oil higher on Middle Eastern tensions with no indication the fighting between Israel and Hezbollah will end anytime soon.