NEWS / Fiscal Policy, Budget

Forex and Commodity Market Commentary and Analysis (19 October 2006)

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The euro appreciated vis-? -vis the U.S. dollar today as the single currency tested offers around the US$ 1.2595 level and was supported around the $1.2530 level. Stops were reached above the $1.2580 level, representing the 23.6% retracement of the move from $1.2980 to $1.2460. Data released in the U.S. today saw weekly initial jobless claims fall 10,000 to 299,000 in the week ending 14 October ??“ the lowest showing since the week ending 22 July ??“ while continuing jobless claims rose 25,000 to 2.45 million in the week ending 7 October. Traders await the release of the Philadelphia Fed survey later in the North American session, especially after that survey was weak last month. Most traders believe the Federal Open Market Committee will keep interest rates unchanged when policymakers convene next Tuesday. Recent comments from Fed officials like Yellen and Poole have underscored the market view that interest rates will be kept on hold for now as the economy continues to moderate. Still, this week??™s core CPI and PPI data were stronger-than-expected and it is clear that current price pressures remain a concern to Fed policymakers. In eurozone news, ratings agencies Fitch and Standard & Poor??™s downgraded Italian debt today on account of the country??™s public finances. European Central Bank policymaker Gonzalez-Paramo said he has ???nothing to say that can alter market expectations??? that the ECB will lift rates to 3.5% at its December meeting and said the central bank will remain ???very attentive??? to inflation risks. Germany??™s six leading economic research institutes lifted their 2006 German GDP forecasts to 2.3% and see growth around 1.4% in 2007. Data released in Germany today saw September producer price inflation off 0.3% m/m and up 5.1% y/y. Euro bids are cited around the US$ 1.2500 figure.

??/ CNY

The yen appreciated vis-? -vis the U.S. dollar today as the greenback tested bids around the ??118.45 level and was capped around the ??119.00 figure. Technically, today??™s intraday high was right around the 38.2% retracement of the move from ??147.65 to ??101.30. Bank of Japan Governor Fukui reported Japan??™s economy is moderately expanding and reiterated deflation is easing. There has been no change to the premise the central bank will lift interest rates higher gradually. Capital flows data released overnight saw foreign investors as net buyers of Japanese equities in the week to 14 October. A dominant geopolitical factor involves reports that North Korea will conduct another nuclear test in short order. Subsequent tests could put the yen back on the defensive, given Japan??™s physical proximity to the Korean peninsula. The Nikkei 225 stock index lost 0.61% to close at ??16,551.36. Dollar bids are cited around the ??116.75 level. The euro weakened vis-? -vis the yen as the single currency tested bids around the ??148.75 level and was capped around the ??149.20 level. The British pound weakened vis-? -vis the yen as sterling tested bids around the ??221.45 level while the Swiss franc moved higher vis-? -vis the yen and tested offers around the ??93.85 level. The Chinese yuan depreciated vis-? -vis the U.S. dollar as the greenback closed at CNY 7.9102 in the over-the-counter market, up from CNY 7.9080, and at CNY 7.9095 in the exchange-traded market. Many data were released in China overnight. First, it was reported that Q3 GDP expanded 10.4% y/y, a moderation of economy growth from Q2??™s 11.3% pace. Second, January ??“ September CPI was up 1.3% y/y and industrial value-added output was up 17.2% y/y. Third, September retail sales were up 13.9% y/y and September producer prices were up 3.5% y/y. Fourth, urban fixed asset investment was up 23.6% y/y and Q3 wholesale prices were up 3% y/y.

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The British pound appreciated sharply vis-? -vis the U.S. dollar today as cable tested offers around the US$ 1.8750 level and was supported around the $1.8665 level. Cable bulls cite the $1.8795 level as the pair??™s next upside target followed by $1.8860 level. Bank of England Deputy Governor Lomax indicated the economy ???just pulled out of a soft patch??? and defended the central bank??™s growth forecasts. She also discounted the notion that the recent run-up in U.K. house prices is going to precipitate a boom in the economy. Data released in the U.K. today saw September BSA mortgage lending and mortgage approvals slow from August??™s levels while BBA saw mortgage lending recede to ?‚¤5.4 billion from ?‚¤5.9 billion. In contrast, CML saw September gross mortgage lending at its highest level ever for the month. Also, September retail sales were off 0.4% m/m, the first decline since January. Also, the Treasury estimated the U.K. government is on track to record its largest deficit in more than one decade. Cable bids are cited around the US$ 1.8725 level. The euro moved higher vis-? -vis the British pound as the single currency tested offers around the ?‚¤0.6725 level and was capped around the ?‚¤0.6700 figure.

CHF

The Swiss franc appreciated strongly vis-? -vis the U.S. dollar today as the greenback tested bids around the CHF 1.2605 level and was capped around the CHF 1.2705 level. Dollar bears see the CHF 1.2580 level as the pair??™s next downside target along with the CHF 1.2520 level. Data released in Switzerland today saw August retail sales climb 4.5% y/y while Switzerland??™s trade surplus was a record ?‚¤1.8 billion with the January ??“ September trade surplus at ?‚¤8.5 billion. U.S. dollar offers are cited around the CHF 1.2685 level. The euro and British pound came off vis-? -vis the Swiss franc as the crosses tested bids around the CHF 1.5875 and CHF 2.3615 levels, respectively.

AUD

The Australian dollar moved higher vis-? -vis the U.S. dollar today as the Aussie tested offers around the US$ 0.7580 level and was supported around the $0.7540 level. Australian dollar bids are cited around the $0.7520 level.

CAD

The Canadian dollar appreciated vis-? -vis the U.S. dollar today as the greenback tested bids around the C$ 1.1330 level and was capped around the C$ 1.1370 level. Traders await remarks from Bank of Canada Governor Dodge later in the North American session. U.S. dollar offers are cited around the C$ 1.1450 level.

NZD

The New Zealand dollar gained ground vis-? -vis the U.S. dollar today as the kiwi tested offers around the US$ 0.6660 level and was supported around the $0.6620 level. New Zealand dollar offers are cited around the US$ 0.6685 level.

Gold/ Silver

Gold appreciated vis-? -vis the U.S. dollar today as the yellow metal tested offers around the US$ 600.54 level and was supported around the $586.64 level. The firmer price of oil contributed to gold??™s gains. Silver moved higher vis-? -vis the U.S. dollar as the pair tested offers around the $12.08 level and was supported around the $11.60 level.

Crude Oil

Crude oil moved higher vis-? -vis the U.S. dollar today as light, sweet NYMEX crude oil futures for December delivery tested offers around the US$ 60.24 level and was supported around the $59.31 level. As expected, OPEC agreed to reduce oil production by one million barrels per day.