NEWS / Monetary Policy

Forex and Commodity Market Commentary and Analysis (24 October 2006)

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The euro came off vis-? -vis the U.S. dollar today as the single currency tested bids around the US$ 1.2525 level and was capped around the $1.2550 level. Today??™s tight range was on account of the two-day Federal Open Market Committee meeting that started today. The Fed??™s interest rate decision will be announced tomorrow and most traders expect the Fed to keep interest rates unchanged at 5.25%. The Fed will likely acknowledge that core inflation levels remain elevated and note that economic activity continues to moderate, possibly mentioning the slowing housing market. The Fed??™s statement may also try to reduce the market??™s expectations of a rate cut as the federal funds futures contract is now pricing in about a 14% chance of a monetary easing in Q1 2007. Dealers are curious to see if Richmond Fed President Lacker again votes for a rate hike. The October Richmond Fed manufacturing index will be released later in the North American session. In eurozone news, French household consumption of manufactured goods was off 2.7% m/m in September, its sharpest fall in a decade. These data were tempered by a larger-than-expected 3.7% m/m and 14.3% y/y climb in August EMU-12 industrial orders. Other EMU-12 data released today saw the eurozone August current account balance print at -?‚¬6.9 billion, larger than July??™s -?‚¬3.9 billion balance. Most trades continue to anticipate another +25bps rate hike from European Central Bank in December. Euro bids are cited around the US$ 1.2500/ 1.2480 levels.

??/ CNY

The yen depreciated vis-? -vis the U.S. dollar today as the greenback tested offers around the ??119.65 level and was supported around the ??119.25 level. Stops were reached above the ??119.45 level, representing the 76.4% retracement of the move from ??119.85 to ??118.05. The yen was also given on most of its crosses as traders continue to conduct short-yen carry trades with no firm sign of additional Bank of Japan carry trades in sight anytime soon. September trade balance data will be released overnight. The Nikkei 225 stock index shed 0.05% to close at ??16,780.47. Dollar bids are cited around the ??119.25 level. The euro moved higher vis-? -vis the yen as the single currency tested offers around the ??149.95 level and was supported around the ??149.60 level. The British pound and Swiss franc gained ground vis-? -vis the yen as the crosses tested offers around the ??223.80 and ??94.25 levels, respectively. The Chinese yuan depreciated vis-? -vis the U.S. dollar today as the greenback closed at CNY 7.9025 in the over-the-counter market, up from CNY 7.8991, and at CNY 7.9020 in the exchange-traded market. Data released in China today saw H1 non-financial overseas direct investment up 65.3% to US$ 6.44 billion while industrial firms??™ profits were up 29.6% in the January ??“ September period. Also, the September property climate index was up 1.72% y/y and Q3 property prices in major cities was up 5.5% y/y. China Banking Regulatory Commission today warned of escalating credit and liquidity risks in the Chinese banking sector. Notably, the non-performing loan ratio at major Chinese commercial banks fell to 7.6% in September from 8.9% at the beginning of 2006.

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The British pound weakened vis-? -vis the U.S. dollar today as cable tested bids around the US$ 1.8670 level and was capped around the $1.8735 level. Technically, today??™s intraday low was just above the 23.6% retracement of the move from $1.9145 to $1.8515. Sterling fell today on account of the weaker Confederation of British Industry??™s industrial trends survey that was released today. A net balance of -20 of manufacturers indicated total orders books were above normal, down from -5 in September and the worst result since January??™s -28 reading. Additionally, the export orders balance fell to -11 and the expected volume of output balance receded to +9. Most traders expect Bank of England to lift interest rates by +25bps next month. Cable bids are cited around the US$ 1.8595 level. The euro moved marginally higher vis-? -vis the British pound as the single currency tested offers around the ?‚¤0.6715 level and was supported around the ?‚¤0.6695 level.

CHF

The Swiss franc came off vis-? -vis the U.S. dollar today as the greenback tested offers around the CHF 1.2700 figure and was supported around the CHF 1.2660 level. Dollar offers are cited around the CHF 1.2735 level. The euro and British pound gained ground vis-? -vis the Swiss franc as the crosses tested offers around the CHF 1.5920 and CHF 2.3755 levels, respectively.

AUD

The Australian dollar came off vis-? -vis the U.S. dollar today as the Aussie tested bids around the US$ 0.7560 level and was capped around the US$ 0.7580 level. Australian dollar bids are cited around the US$ 0.7520 level.

CAD

The Canadian dollar wakened vis-? -vis the U.S. dollar today as the greenback tested offers around the C$ 1.1320 level and was supported around the C$ 1.1275 level. Stops were hit above the C$ 1.1295 level, representing the 61.8% retracement of the move from C$ 1.1455 to C$ $1.1030. U.S. dollar offers are cited around the C$ 1.1355 level.

NZD

The New Zealand dollar came off vis-? -vis the U.S. dollar today as the kiwi tested bids around the US$ 0.6610 level and was capped around the US$ 0.6640 level. 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$ 573.30 level and was capped around the $582.13 level. Some physical demand is cited on account of the Diwali and Eid festivals but the pair continues to shy away from the $600 figure. Silver moved lower vis-? -vis the U.S. dollar as the pair tested bids around the US$ 11.34 level and was capped around the $11.74 level.

Crude Oil

Crude oil appreciated vis-? -vis the U.S. dollar today as light, sweet NYMEX crude oil futures for December delivery tested offers around the US$ 59.32 level and was supported around the $58.45 level. Traders continue to await evidence that most or all of OPEC??™s members support the recently-announced 1.2 million barrel per day reduction in supply. Also, a cold spell expected in the U.S.??™s oil-dependent northeast is keeping prices supported today.