NEWS / Indicators

Forex and Commodity Market Commentary and Analysis (6 September 2006)

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The euro depreciated vis-? -vis the U.S. dollar today as the single currency tested bids around the US$ 1.2770 level and was capped around the $ 1.2830 level. Technically, today??™s intraday high was right around the 23.6% retracement of the move from $1.2460 to $1.2940. Data released in the U.S. today saw revised Q2 productivity print at +1.6%, up from initial estimates of +1.1% and down from Q1??™s unrevised pace of +4.3%. Unit labour costs expanded 4.9% in Q2, up from the previous reading of +4.2% but below the 9% pace of Q1 ??“ the fastest pace since Q3 2000. In other U.S. news, the Augist ISM services survey printed at 57.0. In eurozone news, the big story of the day involved remarks from European Central Bank policymaker Weber who hawkishly said ???(the ECB) has not decided that by the end of the year, the withdrawal of the (current) accommodative policy should be stopped. If our baseline scenario is confirmed, then there is a need to take action...There would be a need to withdraw our accommodative monetary policy. This does not mean we are going to have a restrictive policy. If these upward risks occur then, as Mr Trichet has said, we would be required to do what is needed to stabilize prices.??? All monetary indications show that liquidity is very expansive...and if you look at the upward risks, our policy is still expansive...An adjustment of the stimulative policy is needed.??? Regarding the U.S. economy, he added ???risk of a cooling down (in the US)" appears to be stronger than expected.??? ECB??™s Liikanen was also hawkish noting inflation risks must be monitored and added interest rates are low by historical standards.??? Data released in Germany today saw July manufacturing orders rise 1.8% m/m. Eurozone money markets reacted to the hawkish talk from ECB officials by pricing in a higher 36% chance the ECB will lift rates in February 2007, up from 30% prior to the comments. Euro bids are cited around the US$ 1.2755/ 00 levels.

??/ CNY

The yen depreciated vis-? -vis the U.S. dollar today as the greenback tested offers around the ??116.75 level and was supported around the ??115.95 level. Technically, today??™s intraday low was right around the 50% retracement of the move from ??117.85 to ??113.95 and today??™s intraday high was right around the 23.6% retracement of the move from ??101.65 to ??121.40. A Nikkei poll released today predicted June quarterly GDP will likely be upwardly revised to 1.0% from the initial estimate of 0.8%. The Nikkei 225 stock index shed 0.62% to close at ??16,284.09. The euro moved higher vis-? -vis the yen as the single currency tested offers around the ??149.35 level and was supported around the ??148.65 level. The British pound moved lower vis-? -vis the yen as sterling tested bids around the ??219.35 level while the Swiss franc moved higher vis-? -vis the yen and tested offers around the ??94.35 level. The Chinese yuan appreciated vis-? -vis the U.S. dollar as the greenback closed at CNY 7.9443 in the over-the-counter market, down from CNY 7.9488, and at CNY 7.9460 in the exchange-traded market. Premier Wen talked about the yuan overnight saying ???We will firmly deepen the yuan exchange rate formation mechanism reform and let market supply and demand set the exchange rate level and gradually allow more exchange rate flexibility. Therefore, there won't be any 'unexpected' adjustment to the yuan exchange rate. The yuan exchange rate moved both upward and downward and exchange rate flexibility gradually increased. The yuan has appreciated moderately so far, near four per cent against the U.S. dollar.???

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The British pound extended its recent pullback vis-? -vis the U.S. dollar today as cable tested bids around the US$ 1.8790 level and was capped around the $1.8955 level. Technically, today??™s intraday high was right around the 50% retracement of the move from $1.9145 to $1.8775. There were two main drivers that led to an extension of sterling??™s losses. First, there is growing media speculation that Prime Minister Blair will step down in July, 2007 with Chancellor of the Exchequer Brown expected to succeed him. Political uncertainty is reverberating through the currency markets. Second, Nationwide reported August U.K. consumer confidence fell to its lowest level on record, overshadowing July industrial production data that saw industrial production register good gains in July. Also, BRC reported its August shop price index was up 1.40% y/y, the highest rate since May 2004. Cable bids are cited around the US$ 1.8740 level. The euro moved higher vis-? -vis the British pound as the single currency tested offers around the ?‚¤0.6795 level and was supported around the ?‚¤0.6760 level.

CHF

The Swiss franc came off vis-? -vis the U.S. dollar today as the greenback tested offers around the CHF 1.2400 figure and was supported around the CHF 1.2325 level. Stops were reached above the CHF 1.2390 level, representing the 50% retracement of the move from CHF 1.2595 to CHF 1.2180. Dollar offers are cited around the CHF 1.2495 level. The euro moved higher vis-? -vis the Swiss franc as the single currency tested offers around the CHF 1.5845 level while the British pound moved lower vis-? -vis the Swiss franc and tested bids around the CHF 2.3280 level.




AUD

The Australian dollar slipped lower vis-? -vis the U.S. dollar today as the Aussie tested bids around the US$ 0.7655 level and was capped around the $ 0.7715 level. Technically, today??™s intraday low was right around the 38.2% retracement of the move from US$ 0.7550 to $ 0.7720. Reserve Bank of Australia kept its official cash rate unchanged at 6.00% overnight as expected and last raised rates last month by +0.25%. Outgoing RBA Governor Macfarlane last month said rate pressures are still on the upside. Data released in Australia today saw Q1 GDP up 0.3% q/q and 1.9% y/y, below expectations. Australian dollar bids are cited around the US$0.7635 level.

CAD

The Canadian dollar appreciated vis-? -vis the U.S. dollar today as the greenback tested bids around the C$ 1.1055 level and was capped around the C$ 1.1135 level. Technically, today??™s intraday level was right around the 23.6% retracement of the move from $1.1455 to $1.1030. As expected, Bank of Canada kept its overnight target rate unchanged at 4.25% with the Bank Rate steady at 4.50%. BoC reported ???Since the July Monetary Policy Report Update (MPRU), the global economy has continued its solid expansion. While there has been some moderation in U.S. economic growth, in the rest of the world growth has strengthened further. Commodity prices have remained firm through this period. In Canada, the level of economic activity in the second quarter of 2006 was somewhat below the Bank's expectations, primarily because of weaker exports. Total and core CPI inflation in July came in slightly higher than the Bank expected, owing largely to price strength in the housing and services sectors??¦Looking forward, the Bank continues to expect the Canadian economy to operate at about its production potential, with total CPI inflation returning to the 2 per cent inflation target in the second half of 2007. The key risks to the outlook over the next few quarters remain those set out in the July MPRU: the upside risks to Canadian output and inflation relate primarily to the momentum in household spending and housing prices, while the main downside risk is that U.S. household demand could slow more rapidly than expected, thus reducing demand for Canadian exports. While both these risks appear to be a little greater than they were in July, the Bank continues to judge that, overall, risks are roughly balanced.??? U.S. dollar offers are cited around the C$ 1.1195 level.

NZD

The New Zealand dollar moved higher vis-? -vis the U.S. dollar today as the kiwi tested offers around the US$ 0.6500 figure and was supported around the $0.6445 level. New Zealand dollar offers are cited around the US$ 0.6615 level.

Gold/ Silver

Gold moved higher vis-? -vis the U.S. dollar today as the yellow metal tested offers around the US$ 640.30 level and was supported around the $634.25 level. Today??™s intraday high represents a four-week high. Silver moved higher vis-? -vis the U.S. dollar as the pair tested offers around the US$ 13.20 level and was supported around the $12.93 level.

Crude Oil

Crude oil moved lower vis-? -vis the U.S. dollar today as light, sweet NYMEX crude oil futures for October delivery tested bids around the US$ 67.85 level and was capped around the $68.82 level. The end of the U.S. summer traveling season has led to a decline in prices and traders report fears over supply-side dislocations are waning. Talks between the European Union and Iran have been postponed and the U.S.??™s calls for United Nations-imposed sanctions are likely to increase.