NEWS / Trade Policy

Forex and Commodity Market Commentary and Analysis (22 November 2006)

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The euro galloped higher vis-? -vis the U.S. dollar today as the single currency tested offers around the US$ 1.2925 level and was supported around the $1.2840 level. Stops were hit above the $1.2890 level, representing the 61.8% retracement of the move from $1.3665 to $1.1640. Traders are once again talking about the psychologically-important US$ 1.3000 figure. A couple of factors conspired against the dollar today. First, the White House downwardly revised its forecast for economic growth in the current business quarter and 2007 with officials now eyeing Q4 growth of +3.1% y/y. The pullback in the U.S. housing market was the largest factor officials cited in downgrading growth forecasts. Second, weekly initial jobless claims data released today saw claims up 12,000 to 321,000 while continuing jobless claims rose 14,000 to 2.45 million. The U.S. labour market is at or near ???full employment??? and any indication that employment may be receding could impact the dollar. Third, Eurogroup chairman Juncker talked up the eurozone economy, noting ???growth is increasing??? and adding ???inflation is coming into line.??? Data released in the eurozone today saw September industrial orders off 1.3% m/m and were up 7.6% y/y. In U.S. news, Federal Reserve Governor Warsh yesterday indicated price pressures are ???uncomfortably elevated??? and intimated the 50bps of Fed easing that are priced in the market now may be overly benign. The final November University of Michigan consumer sentiment index printed at 92.1, down from October??™s final reading of 93.2. Euro bids are cited around the US$ 1.2855/ 20 levels.

??/ CNY

The yen appreciated vis-? -vis the U.S. dollar today as the greenback tested bids around the ??116.70 level and was capped around the ??117.90 level. Technically, today??™s intraday low was right around the 23.6% retracement of the move from ??101.65 to ??121.40. The yen gained steam despite some yen-negative factors including the first downgrade of the Japanese economy by its government in nearly two years. The government noted ???some weakness in consumption??? but added the economic expansion is continuing. Notably, the Japanese economy just established its longest post-war period of expansion this month and most traders believe the economy will continue to improve and avert deflation. Data released in Japan overnight saw the October trade surplus fall 24.8% y/y to ??614.7 billion, below forecasts, and October supermarket sales declined 3.1% y/y, down for the tenth straight month. Market rumours overnight suggested the Ministry of Finance advised exporters to hedge their dollar risk by selling dollars although this was later denied. There is also chatter that traders are unwinding short yen carry trades, leading to an appreciation of the yen. Eurogroup chairman Juncker verbally intervened overnight saying the yen??™s fall has been too rough. Most trades continue to expect Bank of Japan will lift its overnight interest rate by +25bps to 0.50% by the end of the current fiscal year in March. The Nikkei 225 stock index climbed 1.14% to close at ??15,914.23. Dollar bids are cited around the ??115.70 level. The euro lost ground vis-? -vis the yen as the single currency tested bids around the ??150.65 level and was capped around the ??151.45 level. The British pound weakened vis-? -vis the yen as sterling tested bids around the ??223.20 level while the Swiss franc gained ground vis-? -vis the yen and tested offers around the ??95.10 level. The Chinese yen appreciated vis-? -vis the U.S. dollar as the greenback closed at CNY 7.8647 in the over-the-counter market, down from CNY 7.8710, and at CNY 7.8645 in the exchange-traded market. Data released in China today saw industrial firms??™ profits rise 30.1% in the January ??“ October period.

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The British pound advanced significantly higher vis-? -vis the U.S. dollar today as cable tested offers around the US$ 1.9135 level and was supported around the $1.8980 level. Stops were reached above the $1.9095 level, representing the 76.4% retracement of the move from $1.9175 to $1.8835. Cable improved despite the release of a surprising set of minutes from Bank of England Monetary Policy Committee??™s latest interest rate meeting. Bank of England Deputy Governor Lomax joined MPC member Blanchflower in voting against no hike in rates. The MPC lifted rates by +0.25% to 5.00%, a five-year high. Some dealers are already scaling back their expectations for another MPC rate hike early next year, especially following this month??™s rather dovish quarterly inflation report. The MPC??™s rate policy early next year may be impacted by what happens with pay settlement awards from January onward. Cable bids are cited around the US$ 1.9045/ 20 levels. The euro lost ground vis-? -vis the British pound as the single currency tested bids around the ?‚¤0.6745 level and was capped around the ?‚¤0.6765 level.

CHF

The Swiss franc appreciated sharply vis-? -vis the U.S. dollar today as the greenback tested bids around the CHF 1.2280 level and was capped around the CHF 1.2420 level. Technically, today??™s intraday low was right around the 50% retracement of the move from CHF 1.1285 to CHF 1.3285. Traders await the release of Q3 employment data tomorrow. Dollar offers are cited around the CHF 1.2395 level. The euro and British pound weakened vis-? -vis the Swiss franc as the crosses tested bids around the CHF 1.5875 and CHF 2.3490 levels, respectively.

AUD

The Australian dollar gained ground vis-? -vis the U.S. dollar today as the Aussie tested offers around the US$ 0.7750 level and was supported around the $0.7705 level. Technically, today??™s intraday high was right around the 76.4% retracement of the move from $0.7985 to $0.7015. Data released in Australia today saw the September Westpac leading indicator rise an annualized 5.3%, down from August??™s 6.1% improvement. Australian dollar bids are cited around the US$ 0.7700 figure.

CAD

The Canadian dollar appreciated vis-? -vis the U.S. dollar today as the greenback tested bids around the C$ 1.1380 level and was capped around the C$ 1.1465 level. Data released in Canada today saw October consumer prices rise 0.9% y/y, up from September??™s +0.7% annual tally. Excluding energy prices, CPI expanded 2% y/y, the second consecutive monthly rise. U.S. dollar offers are cited around the C$ 1.1450 level.

NZD

The New Zealand dollar gained marginal ground vis-? -vis the U.S. dollar today as kiwi tested offers around the US$ 0.6720 level and was supported around the $0.6675 level. New Zealand dollar offers are cited around the $0.6870 level.

Gold/ Silver

Gold gained ground vis-? -vis the U.S. dollar today as the yellow metal tested offers around the US$ 632.95 level and was supported around the $626.15 level. The widespread decline in the dollar helped push gold higher. Silver moved higher vis-? -vis the U.S. dollar as the pair tested offers around the US$ 13.17 level and was supported around the $12.98 level. Rumour surrounding the possible formation of a platinum exchange traded fund are driving metals higher, as is talk that some metals options calls will be exercised before expiry at month??™s end, forcing options sellers to buy metals assets.

Crude Oil

Crude oil gained marginal ground vis-? -vis the U.S. dollar today as light, sweet NYMEX crude oil futures for January delivery tested offers around the US$ 60.26 level and were supported around the $59.82 level. Traders were reluctant to build up too many long positions ahead of today??™s U.S. weekly inventories data. News of further hostage-taking in Nigeria near oil production facilities added to the pair??™s gains, as did lingering confusion over delivery problems related to the Trans Alaskan Oil Pipeline.