NEWS / European Community

Forex and Commodity Market Commentary and Analysis (31 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$ 1.2875 level and was supported around the $ 1.2815 level. Stops were reached above the $1.2855 level, representing the 76.4% retracement of the move from $1.2980 to $1.2460. The big event in the U.S. today will be a speech from Fed Chairman Bernanke and a possible follow-up question-and-answer session afterwards. Bernanke did not touch upon monetary policy in a speech he gave last week on globalization at the annual Fed symposium in Jackson Hole. The Federal Open Market Committee next meets on 20 September and traders are split whether or not the Fed will return to raising rates or keep the federal funds target rate unchanged. Data released in the U.S. today saw July personal income and spending print around their forecasts of +0.5% and +0.8%, respectively. The July core personal consumption expenditures index printed at +2.4% from a revised +2.3% on an annualized basis and was up +0.1% m/m. These data reflect the fact that inflation remains an issue for the U.S. economy and will bolster the arguments of monetary hawks who want additional tightening on 20 September. Weekly initial jobless claims fell 2,000 to 316,000 while continuing jobless claims printed at 2.48 million. Additionally, the Chicago Purchasing Managers??™ Index printed at 57.1, just below expectations, while July factory orders were off 0.6%. Richmond Fed President Lacker, the lone dissenter who voted for higher rates at the FOMC meeting on 8 August, yesterday said he??™d like to see the core PCE measure of inflation closer to 1.5%., significantly below its current level. Tomorrow??™s August non-farm payrolls data will be closely monitored to see how many jobs were created this month and that data??™s implications for Fed policy. In eurozone news, EMU-12 inflation data released today saw August inflation recede to 2.3% from July??™s 2.4% level but these data were consistent with expectations and inflation still remains above the ECB??™s 2.0% ceiling target. The European Commission released a survey today that showed consumer inflation expectations rose in August while economic sentiment pulled back across the eurozone. As expected, the European Central Bank kept interest rates unchanged today and traders paid rapt attention to remarks from ECB President Trichet. The ECB chief noted the central bank will maintain ???strong vigilance??? on inflation risks and said further rate hikes will be warranted if the economic recovery continues. Other data released in the eurozone today saw the number of jobless people in Germany rise 5,000 m/m in August while the IfW German think-tank lifted its 2006 German GDP forecast to 2.4% from 2.1%. French finance minister Breton reiterated the euro is ???fully valued??? and said he does not want ECB interest rate policy to ???hamper growth??? in the eurozone. German July retail sales were off 1.5% m/m and unchanged y/y. Euro bids are cited around the US$ 1.2780 level.

??/ CNY

The yen appreciated marginally vis-? -vis the U.S. dollar today as the greenback tested bids around the ??116.90 level and was capped around the ??117.45 level. Vice finance minister Fujii verbally intervened today and reiterated his country??™s basic stance on exchange rates remains unchanged. Many Japanese economic data were released overnight. First, July industrial output was off 0.9% m/m, worse than forecast. Second, July housing starts were off 7.5% y/y, weaker-than-forecast. Third, orders received by the 50 largest contracts declined 20.1% y/y in July. Recent economic data in Japan have been on the weak side and this is altering traders??™ perception that Bank of Japan will raise interest rates one more time in 2006. Most dealers believe BoJ has another +25bps rate hike left this year but if there are any signs of recently-vanquished deflation in upcoming inflation data, it will render it very difficult for the central bank to tighten policy. Japanese media is speculation the government will officially announce the economy has overcome deflation when it releases its monthly assessment next month. The Nikkei 225 stock index climbed 1.69% to close at ??16,140.76. Dollar bids are cited around the ??116.65/ ??115.70 levels. The euro extended recent lifetime highs vis-? -vis the yen as the single currency tested offers around the ??150.70 level and was supported around the ??150.15 level. The British pound and Swiss franc gained ground vis-? -vis the yen as the crosses tested offers around the ??223.80 and ??95.65 levels, respectively. The Chinese yuan appreciated vis-? -vis the U.S. dollar as the greenback closed at CNY 7.9527 in the over-the-counter market, down from CNY 7.9587, and at CNY 7.9522 in the exchange-traded market.

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The British pound appreciated vis-? -vis the U.S. dollar today as cable tested offers around the US$ 1.9090 level and was supported around the $ 1.9030 level. Data released in the U.K. today saw August annual house price inflation print at its highest level since April 2005, according to Nationwide. Also, GfK??™s consumer confidence survey was released today and it declined four points to +8 in August, its lowest level this year. Cable bids are cited around the US$ 1.8895 level. The euro came off vis-? -vis the British pound as the single currency tested bids around the ?‚¤0.6725 level and was capped around the ?‚¤0.6745 level.

CHF

The Swiss franc lost ground vis-? -vis the U.S. dollar today as the greenback tested offers around the CHF 1.2290 level and was supported around the CHF 1.2225 level. Technically, today??™s intraday high was right around the 50% retracement of the move from CHF 1.1285 to CHF 1.3285. Dollar offers are cited around the CHF 1.2340 level. The euro and British pound gained ground vis-? -vis the Swiss franc as the crosses tested offers around the CHF 1.5765 and CHF 2.3410 levels, respectively.

AUD

The Australian dollar moved higher vis-? -vis the U.S. dollar today as the Aussie tested offers around the US$ 0.7645 level and was supported around the US$ 0.7610 level. Data released in Australia today saw July private sector credit growth up 1.2% m/m, above expectations. Also, Q2 private new capital expenditures were up 1.1% q/q and 18.4% y/y, up from Q1??™s +0.6% level q/q level. Australian dollar bids are cited around the US$ 0.7520 level.

CAD

The Canadian dollar lost marginal ground vis-? -vis the U.S. dollar today as the greenback tested offers around the C$ 1.1105 level and was supported around the C$ 1.1060 level. Technically, today??™s intraday low was just above the 76.4% retracement of the move from C$ 1.0930 to C$ 1.1455. Data released in Canada today saw Q2 GDP growth print at +2.0%, down sharply from Q1??™s growth rate of +3.6%. U.S. dollar offers are cited around the C$ 1.1130 level.

NZD

The New Zealand dollar appreciated sharply vis-? -vis the U.S. dollar today as the kiwi tested offers around the US$ 0.6545 level and was supported around the $ 0.6475 level. New Zealand dollar offers are cited around the US$ 0.6565 level.

Gold/ Silver

Gold appreciated sharply vis-? -vis the U.S. dollar today as the yellow metal tested offers around the US$ 626.90 level and was supported around the $ 618.35 level. Silver moved higher vis-? -vis the U.S. dollar as the pair tested offers around the US$ 12.78 level and was supported around the $12.42 level.

Crude Oil

Crude oil came off further vis-? -vis the U.S. dollar today as light, sweet NYMEX crude oil futures tested bids around the US$ 69.53 level and was capped around the $ 70.80 level. As expected, Iran declared it will not suspend its nuclear enrichment activities and this raises the risks of sanctions against the world??™s fourth largest crude exporter. In other news, Nigerian oil unions threatened to strike on 13 September.