8 June 2006
Thursday

Fundamental Outlook at 1400 GMT (EST + 0400)

€

The euro lost significant ground vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.2650 level and was capped around the $1.2810 level.  Technically, today’s intraday low was right around the 50% retracement of the move from $1.3665 to $1.1645.  As expected, the European Central Bank lifted its  main refinancing interest rate to 2.75% from 2.50% and the euro sold off on this news as some traders were expecting a +50bps move.  In his post-meeting statement, ECB President Trichet said “Given the outlook for price developments and the dynamism of money and credit growth in the euro area, we will continue to monitor closely all developments to ensure price stability over the medium and longer term” and added the growth in monetary and credit growth "points to increased upside risks to price stability at longer horizons.” In U.S. news, Atlanta Fed President Guynn was hawkish in his remarks overnight, noting the Federal Reserve would not “let its guard down” in combating inflation.  His remarks were consistent with recent remarks from Chairman Bernanke and other Fed speakers who have clearly been trying to manage inflation expectations.  Most traders continue to believe the Federal Open Market Committee will deliver another +25bps monetary tightening at the end of June while others see a pause and then possibly a move on 8 August.  Regardless of how and when policy materializes, it is clear the Fed remains near the end of its long-standing tightening cycle and it is probable the ECB will need to lift borrowing costs further to normalize policy.  Data released in the U.S. today saw weekly initial jobless claims recede 35,000 to 302,000.  The April trade balance will be released in the U.S. tomorrow and if it prints narrower-than-expected, it could embolden dollar bulls some more.  Euro offers are cited around the US$ 1.2775 level.

¥/ CNY

The yen extended recent losses vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥114.70 level and was supported around the ¥113.35 level.  Today’s intraday high represents the pair’s strongest showing since 27 April and chartists are now eyeing the ¥115.10 level, representing the 61.8% retracement of the move from ¥118.85 to ¥109.00.  Data released in Japan overnight saw May bank lending up 1.2% y/y, the fastest climb in more than ten years, while the May money supply was up 1.4% y/y.  The bank lending data is important because it shows an improvement in the bank credit cycle and coincides with an end in deflation and nascent recovery in personal consumption.  Bank of Japan Deputy Governor Iwata spoke overnight and reiterated the central bank “cannot say what month is good” for raising interest rates from their current near zero per cent level.  He added the economy is “gradually moving toward a normal economy from deflation” and Iwata’s comments from consistent with the non-committal remarks from BoJ Governor Fukui about ending the near-zero per cent interest rate policy.  Other data released in Japan overnight saw the May economy watchers’ index fall for the second consecutive month in May while foreign investors returned as net buyers of Japanese equities for the first time in three weeks.  The Nikkei 225 stock index shed 3.07% to close at ¥14,633.03.  Dollar bids are cited around the ¥113.35 level.  The euro moved lower vis-à-vis the yen as the single currency tested bids around the ¥145.00 figure and was capped around the ¥145.70 level.  The British pound moved higher vis-à-vis the yen as sterling tested offers around the ¥211.05 level while the Swiss franc moved lower vis-à-vis the yen and tested bids around the ¥92.75 level.  The Chinese yuan appreciated vis-à-vis the U.S. dollar as the greenback closed at CNY 8.0089 in the over-the-counter market, down from CNY 8.0172.  China upwardly revised its 2005 actual foreign direct investment to US$ 72.41 billion from its previous US$ 60.33 billion estimate.

₤

The British pound depreciated significantly vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.8370 level and was capped around the $ 1.8575 level.  Technically, the pair stopped short of testing offers around the 61.8% retracement of the move from $1.9550 to $1.7045.  As expected, Bank of England’s Monetary Policy Committee kept interest rates unchanged at 4.50% for a tenth consecutive month.  Data released in the U.K. today saw April manufacturing output decline 0.2% m/m, the weakest performance since October 2005.  Other data released today saw Halifax May house prices up 0.1% m/m and 9.1% y/y.  Cable offers are cited around the US$ 1.8525 level.  The euro moved lower vis-à-vis the British pound as the single currency tested bids around the ₤0.6880 level and was capped around the ₤0.6910 level.

CHF

The Swiss franc weakened vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.2350 level and was supported around the CHF 1.2185 level.  Data released in Switzerland today saw the May unemployment rate recede to 3.3% from 3.5% in April.  Dollar bids are cited around the CHF 1.2250/ 1.2185 levels.  The euro and British pound gained ground vis-à-vis the Swiss franc as the crosses tested offers around the CHF 1.5640 and CHF 2.2705 levels, respectively.

AUD

The Australian dollar moved higher vis-à-vis the U.S. dollar today as the Aussie tested offers around the US$ 0.7465 level and was supported around the $0.7405 level.  Data released in Australia today saw the May unemployment rate print at 4.9%, down from 5.1% in April.  Australian dollar offers are cited around the US$ 0.7485 level.

CAD

The Canadian dollar weakened vis-à-vis the U.S. dollar today as the greenback tested offers around the C$ 1.1210 level and was supported around the C$ 1.1110 level.  Stops were hit above the $1.1190 level, above the 76.4% retracement of the move from C$ 1.1275 to C$ 1.0930.  U.S. dollar offers are cited around the C$ 1.1250 level.

NZD

The New Zealand dollar came off vis-à-vis the U.S. dollar today as the kiwi tested bids around the US$ 0.6240 level and was capped around the $0.6310 level.  New Zealand dollar offers are cited around the US$ 0.6375 level.

Gold/ Silver

Gold depreciated vis-à-vis the U.S. dollar today as the yellow metal tested bids around the US$ 616.50 level and was capped around the $627.70 level. The pair came off on news that Jordanian terrorist Al-Zarqawi was killed in Iraq today.  Silver moved lower vis-à-vis the U.S. dollar as the pair tested bids around the US$ 11.56 level and was capped around the $11.90 level.

Crude Oil

Crude oil weakened vis-à-vis the U.S. dollar today as light, sweet NYMEX crude oil futures for July delivery tested bids around the US$ 69.57 level and was capped around the $70.73 level.  Oil came off after Al Qaeda terrorist Al-Zarqawi was killed. Also, crude fell when Iran confirmed it willing to “solve misunderstandings” about its nuclear program.  Weekly U.S. inventories data released yesterday saw crude inventories unexpectedly rise last week.  Former Fed Chairman Greenspan indicated oil prices are starting to impact the U.S. economy.