NEWS / Foreign Debt

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

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The euro moved lower vis-? -vis the U.S. dollar today as the single currency tested bids around the US$ 1.2500 figure and was capped around the $1.2555 level. Technically, today??™s intraday high was right around the 50% retracement of the move $1.3480 to $1.1640. Data released in the U.S. today saw September consumer price inflation fall 0.5% on the headline and was up +0.2% on the core reading. On an annualized basis, the headline and core readings were up +2.1% y/y and +2.9% y/y, respectively, with the core rate at its strongest level since February 1996. The core rate is significantly above the Federal Reserve??™s perceived comfort zone and could very well result in additional monetary tightening. Other data released in the U.S. today saw September housing starts climb a surprising +5.9% from -4.9% while building permits were off for a sixth consecutive month. In eurozone news, traders await comments from European Central Bank President Trichet and ECB member Liebscher later in the North American session. Earlier, Liebscher gave tacit approval to the market??™s perception that the ECB will raise rates in December but did not suggest a policy course for 2007. ECB??™s Hurley indicated the ECB??™s rates are starting to cool the housing market. Data released in the eurozone today saw the EMU-12 August trade balance print at -?‚¬5.8 billion, down from July??™s +?‚¬1.6 billion level. Euro offers are cited around the US$ 1.2650 level.

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The yen depreciated vis-? -vis the U.S. dollar today as the greenback tested offers around the ??119.15 level and was supported around the ??118.30 level. Some yen buying was seen overnight after a report emerged that Bank of Japan is concerned with the impact of yen carry trades on the yen and short-term Japanese interest rates. Yen carry trades involve the sale of yen to invest in higher-yielding assets and can create more volatility when traders scramble to cover their short yen positions. Data released in Japan today saw the August leading index downwardly revised to 18.2 from 20.0. Minutes from Bank of Japan Policy Board??™s interest rate deliberations on 7-8 September were released overnight and indicated ???The economy was likely to continue to expand moderately, in an environment in which a virtuous cycle of production, income, and expenditure would operate. Members agreed that the year-on-year rate of change in the CPI (excluding fresh food, on a nationwide basis) had been on a positive trend in the 2005 base-year series as in the 2000 base-year series, and that it was likely to continue to follow a positive trend, as the output gap continued to be positive.??? One factor that may keep the yen on the defensive is a potential second nuclear test by North Korea. The tense situation may become exacerbated as U.S. Secretary of State Rice travels to the region. The Nikkei 225 stock index gained 0.25% to close at ??16,653.00. Dollar bids are cited around the ??118.50/ ??117.60 levels. The euro came off marginally vis-? -vis the yen as the single currency tested bids around the ??148.50 level and was capped around the ??149.10 level. The British pound moved higher vis-? -vis the yen as sterling tested offers around the ??222.45 level while the Swiss franc weakened vis-? -vis the yen and tested bids around the ??93.30 level. The Chinese yuan appreciated marginally vis-? -vis the U.S. dollar as the greenback closed at CNY 7.9080 in the over-the-counter market, down from CNY 7.9082, and at CNY 7.9068 in the exchange-traded market. A German government source speculated that China may allow greater exchange rate flexibility next year.

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The British pound came off vis-? -vis the U.S. dollar today as cable tested bids around the US$ 1.8665 level and was capped around the US$ 1.8740 level. Sterling was earlier stronger after it was revealed that Bank of England Monetary Policy Committee members Besley and Sentence ??“ the two newest members ??“ voted to raise interest rates this month. The MPC voted to keep interest rates unchanged and most traders believe the MPC will vote to hike rates next month. Data released in the U.K. today saw the September claimant count of unemployment rise to 962,000, its highest level in some five years. The jobless rate now stands at 3.0% of the workforce and average earnings in the three months to August were lower-than-expected. Cable bids are cited around the US$ 1.8595 level. The euro moved lower vis-? -vis the British pound as the single currency tested bids around the ?‚¤0.6695 level and was capped around the ?‚¤0.6710 level.

CHF

The Swiss franc depreciated vis-? -vis the U.S. dollar today as the greenback tested offers around the CHF 1.2740 level and was supported around the CHF 1.2655 level. Technically, today??™s intraday high was right around the 61.8% retracement of the move from CHF 1.3235 to CHF 1.1920. Data released in Switzerland today saw Swiss bankruptcies fall 1.2% in the first nine months of the year. U.S. dollar offers are cited around the CHF 1.2815 level. The euro and British pound gained ground vis-? -vis the Swiss franc as the crosses tested offers around the CHF 1.5930 and CHF 2.3780 levels, respectively.

AUD

The Australian dollar was off marginally vis-? -vis the U.S. dollar today as the Aussie tested bids around the US$ 0.7520 level and was capped around the $0.7550 level. Data released in Australia today saw the August Westpac leading indicator up an annualized 6.1%, down from July??™s annualized 6.4% level. Traders await the release of Reserve Bank of Australia??™s Bank Bulletin tomorrow. Australian dollar bids are cited around the US$ 0.7500 figure.

CAD

The Canadian dollar appreciated marginally vis-? -vis the U.S. dollar today as the greenback tested bids around the C$ 1.1370 level and was capped around the C$ 1.1410 level. Notably, Bank of Canada reduced its GDP forecast for 2006 to 2.8% from 3.2% in its July forecast. U.S. dollar offers are cited around the C$ 1.1450 level.

NZD

The New Zealand dollar came off marginally vis-? -vis the U.S. dollar today as the kiwi tested bids around the US$ 0.6605 level and was capped around the $0.6645 level. New Zealand dollar offers are cited around the US$ 0.6685 level.

Gold/ Silver

Gold rebounded vis-? -vis the U.S. dollar today as the yellow metal tested offers around the US$ 595.20 level and was supported around the $589.10 level. The move higher in oil and escalating tensions with North Korea are supporting the pair. Silver moved higher vis-? -vis the U.S. dollar as the pair tested offers around the US$ 11.93 level and was supported around the $11.67 level.

Crude Oil

Crude oil lifted higher vis-? -vis the U.S. dollar today as light, sweet NYMEX crude oil futures for November delivery tested offers around the US$ 61.22 level and was supported around the $60.14 level. U.S. weekly crude oil stocks data evidenced a more-than-expected inventory of 5.1 million barrels. Traders await details from tomorrow??™s emergency OPEC meeting in Qatar.