NEWS / Monetary Policy

Forex and Commodity Market Commentary and Analysis (18 September 2006)

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The euro moved higher vis-? -vis the U.S. dollar today as the single currency tested offers around the US$ 1.2695 level and was supported around the $ 1.2630 level. U.S. Treasury Secretary Paulson verbally intervened in Singapore again, noting ???A strong dollar is clearly in our nation's interest. And I believe that if foreign governments and foreign investors choose to buy US securities, they've got confidence and they know they're getting the best risk-adjusted rate of return.??? Paulson also tackled weighty issues like Chinese currency reform in his comments. Data released in the U.S. today saw the current account balance widen to ??“US$218.4 billion in the second quarter, a worsening of 2.4% from the previous three months period. During the first half of 2006, the deficit has expanded 12.1% to ??“US$ 431.6 billion, or about 6.6% of GDP. Additionally, the deficit in Q1 was outwardly revised to ??“US$ 213.2 billion. Other dollar-negative data released today saw July Treasury International Capital Securities inflows of foreign portfolios print at US$ 32.9 billion, down from June??™s $75.1 billion level and the lowest showing since May 2005. This means the U.S. did not attract enough foreign capital two months ago to finance its massive trade deficit for which it requires more than US$ 2 billion per day. The big news this week will likely be Wednesday??™s Federal Open Market Committee meeting. Most traders do not expect the Fed to lift interest rates at this time but a move is certainly within the realm of possibilities. In eurozone news, European Central Bank member Stark noted eurozone economic growth and the employment picture are healthy while ECB member Draghi reported EMU-12 interest rates are still ???extraordinarily low.??? ECB??™s Liebscher hawkishly added he sees ???rising danger of rising inflation??? while ECB??™s Gonzalez-Paramo does not see any threat of eurozone growth remaining intact. The financial markets are now pricing in about an 85% chance of interest rates escalating to 3.75% by the middle of 2007. Data released in the eurozone today saw July industrial output at -0.4% on weaker showings in France and Italy. Germany??™s HWWA economic institute upwardly revised its 2006 and 2007 German growth forecasts. Euro bids are cited around the US$ 1.2560 level.


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The yen depreciated vis-? -vis the U.S. dollar today as the greenback tested offers around the ??118.30 level and was supported around the ??117.25 level. Today??™s intraday high represents the pair??™s strongest showing since 17 April. Japanese financial markets were closed today for a national holiday. The yen??™s move lower followed the lack of a reference to the yen??™s recent weakness in the Group of Seven??™s communiqu?©. Most traders did not expect a reference, especially as Japanese finance minister Tanigaki chaired the meetings in Singapore. European Central Bank President Trichet said ???We noted that the exit from the zero interest rate policy (in Japan) and that its recovery is now broadly based - we agree that the yen will reflect these developments.??? Vice finance minister for international affairs Watanabe reported ???I don't see any real big depreciation of the dollar would be observed in the coming days. Each country has its own policy on how much worth to keep holding in the dollar or euro, and hopefully some portion in the yen.??? Nationwide department store sales data will be released overnight. Dollar bids are cited around the ??117.15/ ??116.85 levels. The euro moved higher vis-? -vis the yen as the single currency tested offers around the ??149.75 level and was supported around the ??148.20 level. The British pound and Swiss franc moved higher vis-? -vis the yen as the crosses tested offers around the ??222.25 and ??94.25 levels, respectively. The Chinese yuan appreciated vis-? -vis the U.S. dollar as the greenback closed at CNY 7.9468 in the over-the-counter market, down from CNY 7.9565, and at CNY 7.9450 in the exchange-traded market. U.S. Treasury Secretary Paulson spoke at the G7 meeting in Singapore and said ???I believe China should be moving ever faster with their reforms. There are many steps that all of us should be taking faster. I am not looking for immediate solutions or quick fixes on any particular economic issues. There are very few things that are worthwhile that can be achieved in the short term. I'm looking to set a tone and an expectation of working through issues and making progress. These things generally take a bit of compromise, generally take patience, generally take listening as well as talking, and in the case of China, it takes a process where you talk to all the right people.??? People??™s Bank of China Governor Zhou reported China??™s inflation is low and ???will likely face upward pressure in the future.??? Regarding the yuan, Zhou added ???I think China's policy is clear that we are gradually moving towards more flexibility than where it is. But right now we are still in a very initial stage of discussion on how we can do it.???

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The British pound moved lower vis-? -vis the U.S. dollar today as cable tested bids around the US$ 1.8735 level and was capped around the US$ 1.8835 level. Technically, today??™s intraday high was right around the 50% retracement of the move from $1.9090 to $1.8600. Data released in the U.K. today saw Rightmove September house prices move modestly. Also, Bank of England released an inflation expectations survey that reports 65% of Britons see higher inflation, a two-year high. Cable bids are cited around the US$ 1.8675 level. The euro moved higher vis-? -vis the British pound as the single currency tested offers around the ?‚¤0.6755 level and was supported around the ?‚¤0.6725 level.


CHF

The Swiss franc appreciated vis-? -vis the U.S. dollar today as the greenback tested bids around the CHF 1.2510 level and was capped around the CHF 1.2585 level. Technically, today??™s intraday low was right around the 38.2% retracement of the move from CHF 1.1285 to CHF 1.3285. Dollar offers are cited around the CHF 1.2685 level. The euro and British pound moved lower vis-? -vis the Swiss franc as the crosses tested bids around the CHF 1.5870 and CHF 2.3500 figures, respectively.

AUD

The Australian dollar gained marginal ground vis-? -vis the U.S. dollar today as the Aussie tested offers around the US$ 0.7535 level and was supported around the $0.7510 level. Australian dollar bids are cited around the US$0.7495 level.

CAD

The Canadian dollar depreciated vis-? -vis the U.S. dollar today as the greenback tested bids around the C$ 1.1160 level and was capped around the C$ 1.1220 level. Data released in Canada today saw foreign purchases of Canadian securities total US$ 3.2 billion in July while Canadians invested US$ 6.3 billion in foreign securities. U.S. dollar offers are cited around the C$ 1.1245/ 95 levels.

NZD

The New Zealand dollar moved higher vis-? -vis the U.S. dollar today as the kiwi tested offers around the US$ 0.6660 level and was supported around the US$ 0.6610 level. New Zealand dollar offers are cited around the $0.6685 levels.

Gold/ Silver

Gold moved higher vis-? -vis the U.S. dollar today as the yellow metal tested offers around the US$584.15 level and was supported around the $578.10 level. Silver moved higher vis-? -vis the U.S. dollar as the pair tested offers around the $11.00 figure and was supported around the $10.75 level.

Crude Oil

Crude oil gained ground vis-? -vis the U.S. dollar today as light, sweet NYMEX crude oil futures for October delivery tested offers around the US$ 64.44 level and was supported around the $63.49 level. Traders await developments in Iran??™s nuclear standoff with the global community.