NEWS / European Community

Forex and Commodity Market Commentary and Analysis (15 September 2006)

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The euro came off vis-? -vis the U.S. dollar today as the single currency tested bids around the US$ 1.2665 level and was capped around the $1.2735 level. Technically, today??™s intraday low was just above the 50% retracement of the move from $1.3665 to $1.1640. This level has held all week and a break of the area would open up the $1.2560 level to the downside. The common currency came off after the final EMU-12 August harmonized consumer prices index printed at +2.3% y/y, unchanged from the provisional estimate. Notably, this is down from July??™s +2.4% tally and and June??™s +2.5% tally. Core inflation also eased to 1.3% from 1.4% in July, while another core inflation measure that excludes energy and unprocessed food decelerate to 1.5% from 1.6%. These data are very important because they show a recent pullback in price pressures in the eurozone at the same time that European Central Bank officials have stepped up their hawkish rhetoric. ECB policymaking is forward-looking and officials must weigh a probable decrease in global oil prices and the ensuing pullback in inflation that results against a hike in Germany??™s value-added tax scheduled for January 2007. Most traders continue to believe the ECB will raise rates by +25bps in October followed by a similar move in December. Other eurozone data released today saw the July trade surplus at ?‚¬1.5 billion, unchanged from a June??™s revised reading. In U.S. news, the August headline consumer price index was up +0.2% m/m with the core rate up +0.2% m/m, consistent with expectations. On an annualized basis, the headline index was up 3.8% y/y, down from +4.1% y/y, and the core index printed at +2.8% y/y. Traders will debate how these data may impact the Federal Open Market Committee??™s interest rate decision on Wednesday. Additionally, August industrial production was released today and it printed at -0.1%, below expectations, while capacity utilization came in at 82.4%, around expectations. Finally, the mid-September University of Michigan consumer sentiment index print at 84.4, up from the August reading of 82.0. The big item ahead of traders this weekend is the Group of Seven finance ministers meeting in Singapore. All eyes will be on the G7 communiqu?© and also any comments made by U.S. Treasury Secretary Paulson, particularly about China??™s foreign exchange regime and massive balance of payments surplus. Euro bids are cited around the US$ 1.2560/ 1.2415 levels.
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The yen came off marginally vis-? -vis the U.S. dollar today as the greenback tested offers around the ??117.75 level and was supported around the ??117.35 level. Technically, the pair continues to orbit the ??117.50 level, representing the 23.6% retracement of the move from ??115.55 to ??118.10. As expected, the government??™s monthly economic assessment was unchanged, noting the economy is ???recovering: for the seventh consecutive month. Notably, the government removed its reference to deflation, representing a major victory for Prime Minister Koizumi a mere two weeks before he leaves office. The report also downgraded the consumption outlook, however, and this caught some traders off-guard. Data released in Japan today saw the July leading index downwardly revised to 27.3 from an initial 40.0. Also, the July tertiary index fell 0.2% m/m, the second consecutive monthly decline. Surprisingly, Economy minister Takenaka will quit the government after some five years in the Koizumi cabinet. Takenaka championed a clean-up of Japan??™s non-performing loans and was instrumental in the agreement to privatize Japan??™s US$ 3 trillion postal savings system. Traders are very alert to this weekend??™s Group of Seven meeting in Singapore with upside risks possible for the yen, especially if officials talk about the yen??™s recent weakness or the need for additional currency flexibility in Asia or China. Talking about exchange rates in Singapore today, BoJ Governor Fukui noted ???Foreign exchange rates reflect the results of overall economic activities and flows of funds more than before, therefore there is no point in considering 'a priori' what appropriate exchange rates are like.??? The Nikkei 225 stock index came off 0.47% to close at ??15,866.93. Dollar bids are cited around the ??117.15/ 116.55 levels. The euro moved lower vis-? -vis the yen as the single currency tested bids around the ??149.00 figure and was capped around the ??149.80 level. The British pound and Swiss franc depreciated vis-? -vis the yen as the crosses tested bids around the ??221.05 and ??93.40 levels, respectively. The Chinese yuan depreciated vis-? -vis the U.S. dollar as the greenback closed at CNY 7.9565 in the over-the-counter market, up from CNY 7.9460, and at CNY 7.9555 in the exchange-traded market. Chinese Premier Wen spoke today and reiterated ???China will continue the reforms to the yuan's exchange rate formation mechanism and gradually increase the exchange rate's flexibility.??? Data released in China today saw actual August foreign direct investment off 8.49% at US$ 4.48 billion. Also, the August property climate index gained 1.55 index points to 103.31.

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The British pound came off vis-? -vis the U.S. dollar today as cable tested bids around the US$ 1.8800 figure and was capped around the $1.8880 level. Technically, today??™s intraday low was right around the 38.2% retracement of the move from $1.8600 to $1.8920. Sterling got a boost in the arm yesterday after retail sales and housing data suggested last month??™s surprise interest rate hike from Bank of England did not have a negative impact on final private demand. Many dealers now expect Bank of England to deliver one more monetary tightening before the end of the year. Cable bids are cited around the US$ 1.8760 level. The euro came off vis-? -vis the British pound as the single currency tested bids around the ?‚¤0.6730 level and was capped around the ?‚¤0.6745 level.

CHF

The Swiss franc depreciated vis-? -vis the U.S. dollar today as the greenback tested offers around the CHF 1.2605 level and was supported around the CHF 1.2510 level. Today??™s intraday high represents the pair??™s strongest print since 28 April of this year. Data released in Switzerland today saw August producer and import prices climb +0.4% m/m and were up +3.1% y/y on account of higher import prices. The annualized rate was up from +2.9% y/y one month earlier. Other data released today saw Q2 industrial output up 4.3% y/y with orders up 8.9% y/y. The Swiss franc??™s recent weakness partially results from comments made by Swiss National Bank member Hildebrand who confirmed Swiss economic growth is likely to decelerate next year. SNB raised interest rates yesterday as expected. U.S. dollar offers are cited around the CHF 1.2685 level. The euro and British pound moved higher vis-? -vis the Swiss franc as the crosses tested offers around the CHF 1.5965 and CHF 2.3705 levels, respectively.

AUD

The Australian dollar moved lower vis-? -vis the U.S. dollar today as the Aussie tested bids around the US$ 0.7510 level and was capped around the $0.7560 level. Australian dollar bids are cited around the $0.7495/ 05 levels.

CAD

The Canadian dollar came off vis-? -vis the U.S. dollar today as the greenback tested offers around the C$ 1.1215 level and was capped around the C$ 1.1165 level. U.S. dollar offers are cited around the C$ 1.1245 level.

NZD

The New Zealand dollar weakened vis-? -vis the U.S. dollar today as the kiwi tested bids around the US$ 0.6565 level and was capped around the $0.6615 level. New Zealand dollar offers are cited around the US$ 0.6685 level.

Gold/ Silver

Gold appreciated vis-? -vis the U.S. dollar today as the yellow metal tested offers around the US$ 579.00 figure and was supported around the $572.60 level. Today??™s intraday low represented the pair??™s weakest showing in some three months. Many traders, however, believe this is still a technical correction and expect the pair to resume its upward march. Gold is now off more than 20% since hitting a 26-year high around US$ 730 in mid-May. Silver moved marginally higher vis-? -vis the U.S. dollar as the pair tested offers around the US$ 10.83 level and was supported around the $10.62 level.


Crude Oil

Crude oil extended recent losses vis-? -vis the U.S. dollar today as light, sweet NYMEX crude oil futures for October delivery tested bids around the US$ 63.05 level and was capped around the $63.45 level. Oil and natural gas supplies are currently at healthy levels and the suspension of a strike in Nigeria contributed to the pair??™s losses. A mild U.S. hurricane season does not appear to be having a major impact on oil production in the U.S. Gulf region and traders await developments in Iran??™s nuclear standoff with the global community.