NEWS / Central Banks

Forex and Commodity Market Commentary and Analysis (10 October 2006)

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The euro sank vis-? -vis the U.S. dollar today as the single currency tested bids around the $1.2520 level and was capped around the $1.2610 level. Major stops were hit below the $1.2560 level, representing the 50% retracement of the move from $1.3480 to $1.1640. The common currency has not been this weak in about three months. Federal Reserve policymakers kept the prospect of higher U.S. interest rates alive in comments they made. San Francisco Fed President Yellen noted ???Core consumer inflation has been uncomfortably high recently.??? Regarding economic growth, she added ???The data we've been seeing in recent months point to a noticeable slowdown for this half of the year, with growth running at only a modest pace and clearly below the rate that is sustainable in the long run.??? Dallas Fed President Fisher speaks today about global monetary policy whereas St. Louis Fed President Poole was quoted as saying the Fed can ???sit back??? and let the U.S. bond market react to the U.S. economy. Data released in the U.S. today saw August wholesale inventories and sales rise 1.1%. Traders await the release of the Federal Open Market Committee??™s September meeting minutes this week along with the Fed??™s monthly Beige Book. In eurozone news, Australian finance minister Grasser said 2006 ???is one of the best years for the eurozone??? while Bank of Greece noted a confirmation of the eurozone??™s inflation outlook should lead to additional rate hikes by European Central Bank. ECB President Trichet testifies today and his comments will be closely watched. Data released in the eurozone today saw French industrial output climb 0.8% m/m in August while Italian output was up 1.2% m/m; these data follow yesterday??™s report of a 1.9% gain in output. Euro bids are cited around the US$ 1.2415 level.

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The yen extended recent losses vis-? -vis the U.S. dollar today as the greenback tested offers around the ??119.65 level and was supported around the ??118.90 level. Today??™s intraday high represents the pair??™s strongest showing in 2006. Data released in Japan today saw the September economy watchers??™ index up 0.8 points m/m, its second consecutive rise. Also, August machinery orders improved 6.7% m/m, below forecast. Yen sentiment is still weaker following North??™s Korea??™s alleged nuclear test on Sunday with Prime Minister Abe vowing Japan will not go nuclear. The Nikkei 225 stock index climbed +0.25% to close at ??16,477.25. Dollar bids are cited around the ??118.25/ 117.30 levels. The euro came off vis-? -vis the yen as the single currency tested bids around the ??149.80 level and was capped around the ??150.10 level. The British pound and Swiss franc depreciated vis-? -vis the yen as the crosses tested bids around the ??221.65 and ??94.15 levels, respectively. The Chinese yuan depreciated sharply vis-? -vis the U.S. dollar as the greenback closed at CNY 7.9112 in the over-the-counter market, up from CNY 7.8995. Data released in China today saw the Q3 business confidence index up 0.1 points m/m and up 5.0 points y/y. Also, Citigroup??™s lifted its 2006 Chinese growth forecast to 10.3% from 9.8%. People??™s Bank of China??™s Fan Gang spoke today and said China does not have ???any other alternatives or choices??? other than holding U.S. dollar reserves. Fan also reiterated China??™s foreign exchange reserves should top US$ 1 trillion at the end of this month or next month. Regarding China??™s current exchange rate regime, Fan noted ???If there's a hard landing in the US and the dollar plunges, and we maintain a managed floating system, the yuan will fall along with the US dollar. I oppose any abrupt appreciation (of the yuan) and a free-floating yuan exchange rate system. I am firmly against a one-sided adjustment by China of the yuan's value.???

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The British pound extended its recent slide vis-? -vis the U.S. dollar today as cable tested bids around the US$ 1.8525 level and was capped around the $1.8700 figure. Technically, today??™s intraday low was right around the 76.4% retracement of the move from $2.0035 to $1.3680. Data released in the U.K. today saw the August global trade in goods deficit print at -?‚¤6.7 billion while BRC??™s like-for-like retail sales measure for September came in lower-than-expected at +2.4% y/y, below August??™s +2.5% pace. Cable bids are cited around the US$ 1.8300 figure. The euro moved higher vis-? -vis the British pound as the single currency tested offers around the ?‚¤0.6765 level and was supported around the ?‚¤0.6740 level.

CHF

The Swiss franc depreciated vis-? -vis the U.S. dollar today as the greenback tested offers around the CHF 1.2700 figure and was supported around the CHF 1.2600 figure. Chartists are eyeing the CHF 1.2735 level as the pair??™s next upside target. Swiss National Bank reported it foresees the Swiss economy expanding about 1.8% in 2007 and sees 2006 growth just under 3%. Also, UBS reported industrial activity peaked in Q3 and noted it expects strong growth in real GDP terms. U.S. dollar offers are cited around the CHF 1.2815 level. The euro moved higher vis-? -vis the Swiss franc as the single currency tested offers around the CHF 1.5915 level while the British pound moved lower vis-? -vis the Swiss franc and tested bids around the CHF 2.3510 level.

AUD

The Australian dollar moved lower vis-? -vis the U.S. dollar today as the Aussie tested bids around the US$ 0.7425 level and was capped around the $0.7460 level. Data released in Australia today saw the September NAB business confidence index remain unchanged at 6.0 points. Australian dollar bids are cited around the US$ 0.7385 level.

CAD

The Canadian dollar depreciated vis-? -vis the U.S. dollar today as the greenback tested offers around the C$ 1.1335 level and was supported around the C$ 1.1225 level. Today??™s intraday high is the pair??™s strongest showing since 4 August. Data released in Canada today saw September housing starts decline slightly. U.S. dollar offers are cited around the C$ 1.1355 level.

NZD

The New Zealand dollar moved higher vis-? -vis the U.S. dollar today as the kiwi tested offers around the US$ 0.6620 level and was supported around the $0.6575 level. Data released in New Zealand overnight saw the NZIER quarterly survey of business opinion improve sharply in the three months to September, indicative of increasing business expectations. New Zealand dollar offers are cited around the US$0.6685 level.

Gold/ Silver

Gold weakened vis-? -vis the U.S. dollar today as the yellow metal tested bids around the US$ 569.30 level and was capped around the $581.25 level. The pair continues to track oil lower. Silver moved lower vis-? -vis the U.S. dollar as the pair tested bids around the US$ 11.09 level and was capped around the $11.41 level.

Crude Oil

Crude oil moved lower vis-? -vis the U.S. dollar today as light, sweet NYMEX crude oil futures for November delivery tested bids around the US$ 59.21 level and was capped around the $60.69 level. Traders await a confirmation from OPEC that it plans to reduce daily output by about one million barrels. Saudi Arabia lowered its shipments to major oil players yesterday. The tense situations involving Iran and North Korea are also keeping traders preoccupied.