NEWS / Trade Policy

Forex and Commodity Market Commentary and Analysis (8 August 2006)

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The euro gained marginal ground vis-? -vis the U.S. dollar today as the single currency tested offers around the US$ 1.2855 level and was supported around the $1.2805 level. Today??™s relatively thin range was attributable to this afternoon??™s Federal Open Market Committee interest rate decision in which Fed policymakers are expected to end their two-year monetary tightening cycle. As is always the case, what the Fed reports in its policy statement will be of paramount importance. In many ways, even if the Fed decides to pause today, its statement will be construed as being forward-looking and perhaps even hopeful. Recent economic data released in the U.S. have seen a pick-up in inflationary pressures and a moderation in economic growth, a difficult scenario for the Fed to contend with. Comments made by St. Louis Fed President Poole and San Francisco Fed President Yellen last week suggested the Fed is likely to pause but noted it will be a close call. Should core inflation remain elevated for some time after the Fed finally pauses, the markets will again question Chairman Bernanke??™s inflation-fighting credentials. Data released in the U.S. today saw Q2 unit labour costs rise a higher-than-expected 4.2% while Q2 non-farm productivity rose 1.1%. In eurozone news, German industrial output fell 0.4% m/m in June and 1.2% y/y, below expectations, while manufacturing output was off 0.7%. Euro bids are cited around the US$ 1.2775/ 1.2665 levels.

??/ CNY

The yen appreciated marginally vis-? -vis the U.S. dollar today as the greenback tested bids around the ??114.90 level and was capped around the ??115.25 level. Today??™s intraday range was thin as dealers held their fire ahead of today??™s Federal Open Market Committee interest rate decision. The Japanese government kept its overall assessment of the economy unchanged this month and noted it is ???recovering??? for the sixth consecutive month. Notably, the government omitted specific references to the word ???deflation??? again but reiterated deflation has not been completed vanquished. Data released last night saw bank lending appreciate 2.2% y/y in July, the fastest growth rate in more than ten years, while the July M2+CDs money supply expanded 0.5% y/y. Also, July machine tool orders were up 1.5% y/y but were off 11.1% from May??™s reading. The Nikkei 225 stock index climbed 2.05% to close at ??15,464.66. Dollar bids are cited around the ??114.35/ ??113.85 levels. The euro moved lower vis-? -vis the yen as the single currency tested bids around the ??147.35 level and was capped around the ??147.95 level. The British pound and Swiss franc moved lower vis-? -vis the yen as the crosses tested bids around the ??219.00 and ??93.70 levels, respectively. The Chinese yuan depreciated vis-? -vis the U.S. dollar as the greenback closed at CNY 7.9732 in the over-the-counter market, up from CNY 7.9689, and at CNY 7.9710 in the exchange-traded market. The government predicted retail sales would expanded 13.5% in H2 2006 and NDRC suggested People??™s Bank of China should raise interest rates in 25bps increments.

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The British pound came off marginally vis-? -vis the U.S. dollar today as cable tested bids around the US$ 1.9030 level and was capped around the $ 1.9075 level. Traders were loath to assume considerable market risk ahead of today??™s FOMC interest rate decision. Data released today saw BRC July like-for-like retail sales increase 3.4% y/y, above expectations. Also, Land Registry reported Q2 house prices accelerated in England and Wales. Cable bids are cited around the US$ 1.8960 level. The euro moved higher vis-? -vis the British pound as the single currency tested offers around the ?‚¤0.6740 level and was supported around the ?‚¤0.6725 level.

CHF

The Swiss franc weakened marginally vis-? -vis the U.S. dollar today as the greenback tested offers around the CHF 1.2280 level and was supported around the CHF 1.2235 level. Traders were loath to assume considerable market risk ahead of today??™s FOMC interest rate decision. The Swiss SECO consumer climate index will be released on Thursday. Dollar offers are cited around the CHF 1.2425 level. The euro gained slight ground vis-? -vis the Swiss franc as the single currency tested offers around the CHF 1.5740 level while the British pound moved lower vis-? -vis the Swiss franc as sterling tested bids around the CHF 2.3325 level.

AUD

The Australian dollar depreciated vis-? -vis the U.S. dollar today as the Aussie tested bids around the US$ 0.7585 level and was capped around the $ 0.7640 level. Stops were triggered below the $0.7615 level, representing the 61.8% retracement of the move from $0.7985 to $0.7015. Data released in Australia today saw the July NAB business confidence index fall to 8.0 from 9.0 in June. Australian dollar bids are cited around the $0.7520 level.

CAD

The Canadian dollar was up marginally vis-? -vis the U.S. dollar today as the greenback tested bids around the C$ 1.1180 level and was capped around the C$ 1.1225 level. June building permits will be released in Canada today. U.S. dollar offers are cited around the C$ 1.1280 level.

NZD

The New Zealand dollar gained marginal ground vis-? -vis the U.S. dollar today as the kiwi tested offers around the US$ 0.6265 level and was supported around the $0.6230 level. Technically, today??™s intraday low was right around 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 came off vis-? -vis the U.S. dollar today as the yellow metal tested bids around the US$ 641.30 level and was capped around the $ 649.50 level. A pullback in oil prices contributed to some profit-taking in gold. Silver moved lower vis-? -vis the U.S. dollar as the pair tested bids around the $12.06 level and was capped around the $12.36 level.

Crude Oil

Crude oil depreciated vis-? -vis the U.S. dollar today as light, sweet NYMEX crude oil futures for September delivery tested bids around the $76.64 level and were capped around the $ 77.11 level. The closure of British Petroelum??™s Prudhoe Bay oilfield in Alaska will see some a supply disruption of some 400,000 barrels per day and that contributed to the pair??™s strong gains yesterday. News that Israel is increasing its offensive in southern Lebanon may keep the pair bid and speculation that Iran is unlikely to end its uranium enrichment activities by this month??™s deadline could see prices remain firm well into the October front month. Tomorrow??™s weekly U.S. inventories data will be closely watched by traders.