NEWS / Foreign Debt

Forex and Commodity Market Commentary and Analysis (17 October 2006)

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The euro strengthened vis-? -vis the U.S. dollar today as the single currency tested offers around the US$ 1.2545 level and was supported around the $1.2505 level. The common currency moved to intraday lows after it was announced that U.S. September producer price inflation printed at -1.3% m/m on the headline reading but was up +0.6% on the ex-food and energy core component. These data suggest there are still some manufacturing-level price pressures that are being pushed through supply chains. On an annualized basis, the headline figure was up +0.9% y/y and the core component was up +1.2% y/y. Traders await tomorrow??™s consumer price inflation data to see how much post-factory level price pressures are in the economy and to assess how this will impact the Fed??™s monetary policy. San Francisco Fed President Yellen made headlines last night when she reported it make sense for the Fed to keep rates unchanged ???for a time??? so that the full effect of the Fed??™s seventeen monetary tightenings can be determined. She reported ???The economy appears to have entered a period of below-trend growth. If this continues for a time, as I think is likely, the tightness we have seen in labor and product markets would ease somewhat, tending gradually to reverse any underlying inflationary pressures.??? Other data released in the U.S. today saw the August Treasury International Capital portfolio flows into the U.S. print at US$ 116.8 billion, up from July??™s reading of US$ 32.9 billion and more than double most forecasts. These data mean the U.S. easily financed its massive trade deficit two months ago. Traders also await the release of the October NAHB housing market index later in the U.S. session to gauge the health of the U.S. housing sector. In eurozone news, the German October ZEW survey??™s index of economic expectations fell to -27.4, a 3 ??-year low while the current conditions index was stronger-than-expected at 42.9. Moreover, final EMU-12 September harmonized inflation was unexpectedly revised lower to +1.7% y/y from the provisional readings of +1.8% y/y. Other eurozone data saw August industrial production up 1.8% m/m and 5.4% y/y. Most traders believe European Central Bank will lift its main refinancing rate to 3.50% by the end of the year. It was also announced that Germany??™s six leading economic institutes are likely to lift their forecasts for the country??™s GDP this year to 2.3% or 2.4%. Euro bids are cited around the US$ 1.2460 level.

??/ CNY

The yen appreciated vis-? -vis the U.S. dollar today as the greenback tested bids around the ??118.60 level and was capped around the ??119.10 level. Today??™s intraday low was just above the 23.6% retracement of the move from ??113.95 to ??119.85. Data released in Japan overnight saw the August tertiary index rise 0.7% m/m and 1.6% y/y, the first improvement in three months. Also, September department store sales were up 1.0% y/y, the first improvement in six months, while condominium sales in Tokyo and Osaka were off last month. Finance minister Omi said he welcomes the decision of Russia??™s central bank that was announced yesterday to lift its yen foreign reserves holdings to ???several per cent??? of its entire reserves composition. The Nikkei 225 stock index lost 0.49% to close at ??16,611.59. Dollar bids are cited around the ??117.95 level. The euro came off vis-? -vis the yen as the single currency tested bids around the ??148.55 level and was capped around the ??149.35 level. The British pound moved marginally higher vis-? -vis the yen as sterling tested offers around the ??221.85 level while the Swiss franc moved lower vis-? -vis the yen and tested bids around the ??93.45 level. The Chinese yuan appreciated vis-? -vis the U.S. dollar as the greenback closed at CNY 7.9082 in the over-the-counter market, down from CNY 7.9098, and at CNY 7.9080 in the exchange-traded market. The government is expected to release Q3 economic data on Thursday.

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The British pound rocketed vis-? -vis the U.S. dollar today as cable tested offers around the US$ 1.8710 level and was supported around the US$ 1.8605 level. Stops were reached above the $1.8665 level, representing the 23.6% retracement of the move from $1.9145 to $1.8515. The move higher reflected a September inflation print of +2.4%, still significantly above the Bank of England??™s 2.0% inflation target rate. The core CPI rate rose to 1.4% from 1.1% in August, its highest showing since November of last year and above expectations. These data may cement the expectation that BoE??™s Monetary Policy Committee will tighten interest rates next month to 5.00%. Cable bids are cited around the US$ 1.8535 level. The euro moved lower vis-? -vis the British pound as the single currency tested bids around the ?‚¤0.6705 level and was capped around the ?‚¤0.6735 level.

CHF

The Swiss franc appreciated vis-? -vis the U.S. dollar today as the greenback tested bids around the CHF 1.2655 level and was capped around the CHF 1.2710 level. Stops were hit below the CHF 1.2685 level, representing the 23.6% retracement of the move from CHF 1.7210 to CHF 1.1285. U.S. dollar offers are cited around the CHF 1.2735 level. The euro came off vis-? -vis the Swiss franc as the single currency tested bids around the CHF 1.5885 level and was capped around the CHF 1.5925 level while the British pound moved higher vis-? -vis the Swiss franc and tested offers around the CHF 2.3710 level.

AUD

The Australian dollar gained marginal ground vis-? -vis the U.S. dollar today as the Aussie tested offers around the US$ 0.7550 level and was supported around the $0.7525 level. Traders await the release of the August Westpac leading index overnight. Australian dollar bids are cited around the US$ 0.7525 level.

CAD

The Canadian dollar was little-changed vis-? -vis the U.S. dollar today as the greenback tested offers around the C$ 1.1390 level and was supported around the C$ 1.1350 level. Technically, today??™s intraday low was right around the 76.4% retracement of the move from C$ 1.1455 to C$ 1.1030. As expected, Bank of Canada kept its main overnight interest rate unchanged at 4.5% with the main Bank Rate at the same level. BoC reported GDP growth in Q2 and Q3 has been ???weaker than expected??? but noted it expects core inflation ???to move slightly above 2 per cent in coming months, and to return to 2% by the middle of 2007.??? BoC??™s next interest rate decision is expected on 5 December. U.S. dollar offers are cited around the C$ 1.1455 level.

NZD

The New Zealand dollar moved higher vis-? -vis the U.S. dollar today as kiwi tested offers around the US$ 0.6645 level and was supported around the $0.6590 level. Kiwi bulls are eyeing the $0.6685 level as the pair??™s next upside target. New Zealand dollar offers are cited around the US$ 0.6870 level.

Gold/ Silver

Gold came off vis-? -vis the U.S. dollar today as the yellow metal tested bids around the US$ 592.20 level and was capped around the $598.00 figure. Silver moved lower vis-? -vis the U.S. dollar as the pair tested bids around the US$ 11.69 level and was capped around the US$ 11.92 level.

Crude Oil

Crude oil weakened vis-? -vis the U.S. dollar today as light, sweet NYMEX crude oil futures for November delivery tested bids around the US$ 59.77 level and was capped around the $60.51 level. OPEC will meet in Doha on Thursday to solidify production cuts and this may put a floor under the price this week, depending on the details. This has to be weighed against rising U.S. crude oil stocks. Traders are also carefully monitoring the situations involving North Korea and Iran with additional diplomatic pressure against both countries expected this week.