29 March 2006
Wednesday

Fundamental Outlook at 1500 GMT (EST + 0500)

€

The euro was little-changed vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.2025 level and was supported around the $1.1980 level.  Today’s range was tight compared to yesterday’s sell-off of the common currency after the Federal Open Market Committee raised the federal funds target rate by +25bps t0 4.75%, as expected.  The Fed’s statement reported “The slowing of the growth of real GDP in the fourth quarter of 2005 seems largely to have reflected temporary or special factors. Economic growth has rebounded strongly in the current quarter but appears likely to moderate to a more sustainable pace. As yet, the run-up in the prices of energy and other commodities appears to have had only a modest effect on core inflation, ongoing productivity gains have helped to hold the growth of unit labor costs in check, and inflation expectations remain contained. Still, possible increases in resource utilization, in combination with the elevated prices of energy and other commodities, have the potential to add to inflation pressures.   The Committee judges that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance. In any event, the Committee will respond to changes in economic prospects as needed to foster these objectives.” Notably, this was Bernanke’s first FOMC meeting as the Chairman and the Fed’s statement reinforced the notion the central bank is in a data-dependent mode.  Many dealers believe the Fed may lift the federal funds target rate by another +25bps on 10 May to 5.00%.  If so, the question becomes whether or not the Fed takes the rate to 5.25% or stands pat at 5.00%.  By comparison, most traders believe the European Central Bank will tighten policy in May by lifting the refinancing rate by +25bps to 2.75%.  ECB’s Gonzalez-Paramo today reported the central bank began tightening policy at a suitable time, reporting “We have said before that there are risks to price stability and second-round effects. The bank has not responded late, but has reacted appropriately to the trend in price risks as we saw them at the time.”  ECB President Trichet yesterday said “The ECB has always recognized that, in response to unforeseen economic disturbances that may threaten price stability, like for instance the one posed by persistently high and volatile oil prices, it is often appropriate to respond in a gradual and measured manner, so as to avoid introducing unnecessary and possibly self-sustaining volatility into short-term interest rates and real activity.”  Data released in Germany today saw German February new orders for machinery and plant rise 9.0% y/y.  Euro offers are cited around the US$ 1.2075 level.

¥/ CNY

The yen lost marginal ground vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥118.05 level and was supported around the ¥117.60 level.  Technically, today’s intraday high was just above the 23.6% retracement of the move from ¥113.40 to ¥119.40.  Data released in Japan today saw February retail sales climb 1.0% y/y, the third increase in four months.  The pair gained some 70 points after yesterday’s interest rate hike by the Federal Open Market Committee. Traders continue to speculate if and by how much Bank of Japan will tighten monetary policy in 2006.  Japan’s current fiscal year concludes on Friday.  February industrial production will be released tonight.  The Nikkei 225 stock index climbed 1.49% to close at ¥16,938.41.  Dollar bids are cited around the ¥117.40 level.  The euro gained marginal ground vis-à-vis the yen as the single currency tested offers around the ¥141.75 level and was supported around the ¥141.20 level.  The British pound and Swiss franc moved lower vis-à-vis the yen as the crosses tested bids around the ¥204.35 and ¥89.75 levels, respectively.  The Chinese yuan depreciated vis-à-vis the U.S. dollar as the greenback closed at CNY 8.0259 on the over-the-counter market, up from CNY 8.0206, and at CNY 8.0250 in the exchange-traded market.  Crucially, the U.S. Senate decided to delay a vote on legislation that would have imposed punitive tariffs on imported Chinese goods following a visit to China last week by Senators Graham and Schumer.

£

The British pound moved sharply lower vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.7315 level and was capped around the $1.7440 level. Technically, today’s intraday low was right around the 76.4% retracement of the move from $1.7130 to $1.7935.  A string of less-than-positive economic data added to sterling’s woes.  First, it was reported that the U.K. recorded its worst-ever current account deficit last year.  Second, Q4 2005 GDP was unrevised at 0.6% q/q, its long-term average.  Third, February Bank of England mortgage lending activity receded to £8.1 billion, the lowest rate since October 2005.  Fourth, the CBI retail sales survey painted a downcast picture of the retail sales sector for March.  Traders sold cable on these news under the pretense that Bank of England may be more inclined to lower interest rates even though BoE Governor King this week suggested inflation will move above 2.0% in the near-term.  Cable offers are cited around the US$ 1.7390 level.  The euro moved higher vis-à-vis the British pound as the single currency tested offers around the £0.6930 level and was supported around the £0.6880 level.

CHF

The Swiss franc weakened vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.3125 level and was supported around the CHF 1.3070.  Technically, today’s intraday low was right around the 23.6% retracement of the move from CHF 1.2555 to CHF 1.3235.  The pair gained some 85 pips yesterday after the Fed’s interest rate decision was announced yesterday.  Dollar bids are cited around the CHF 1.3040 level.  The euro moved higher vis-à-vis the Swiss franc as the single currency tested offers around the CHF 1.5745 level while the British pound moved lower vis-à-vis the Swiss franc and tested bids around the CHF 2.2710 level.

AUD

The Australian dollar came off vis-à-vis the U.S. dollar today as the Aussie tested bids around the US$ 0.7015 level and was capped around the $ 0.7065 level.  Today’s intraday low represents the pair’s weakest footing since September 2005.  The pair lost about 40 pips after yesterday’s FOMC interest rate decision.  Australian dollar offers are cited around the US$ 0.7105 level.

CAD

The Canadian dollar weakened vis-à-vis the U.S. dollar today as the greenback tested offers around the C$ 1.1745 level and was supported around the C$ 1.1690 level.  Today’s intraday high represents the pair’s strongest showing since 19 January of this year.  January average weekly earnings will be released in Canada this morning followed by February industrial product prices tomorrow.  U.S. dollar offers are cited around the C$ 1.1815 level.

NZD

The New Zealand dollar depreciated vis-à-vis the U.S. dollar today as the kiwi tested bids around the US$ 0.5990 level after encountering offers around the $ 0.6050 level.  Notably, kiwi has not trade below the psychologically-important $0.6000 figure since May 2004.  New Zealand offers are cited around the US$ 0.6105 level.

Gold/ Silver

Gold moved lower vis-à-vis the U.S. dollar today as the yellow metal tested bids around the US$ 560.00 level and was capped around the $569.30 level.  The Fed’s decision to lift interest rates yesterday dented gold a little bit and the commodity also fell following a rough session for gold futures on the Tokyo Commodity Exchange overnight.  Silver moved lower vis-à-vis the U.S. dollar today and tested bids around the $10.73 level after running out of steam around the $10.92 level.

Crude oil

Crude oil gained ground vis-à-vis the U.S. dollar today as light, sweet crude NYMEX futures for May delivery tested offers around the US$ 66.14 level and was supported around the $65.58 level.  Notably, the contract closed yesterday at its highest level since 6 February as traders weighted supply risks in Iran and Nigeria.  Weekly inventory data are expected in the U.S. this morning.