15 June 2006
Thursday

Fundamental Outlook at 1400 GMT (EST + 0400)

€

The euro appreciated vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.2660 level and was supported around the $1.2580 level.  The common currency traded just above the 50% retracement of the move from $1.3665 to $1.1640.  Data released in the U.S. today saw May industrial production print at -0.1%, defying expectations of an increase, while weekly jobless claims were off 8,000 to 295,000.  Also, the New York Fed’s Empire State manufacturing index rallied to 29.2 from 12.0 while April Treasury International Capital Services saw incoming international portfolio flows fall to US$ 46.7 billion from a revised US$ 70.4 billion.  These TICS data are important because it shows the U.S. economy is not importing enough international capital to cover its massive trade deficit.  The U.S. requires more than US$ 2 billion per day to finance its current account deficit.  More Fed speakers are on the docket today and tomorrow and as the markets are now fully discounting another +25bps move on 29 June by the Federal Open Market Committee, traders are focusing on if – and by how much – the Fed will raise rates later in the year.  The Fed’s Beige Book was released yesterday and noted the U.S. economy is showing “some signs of deceleration.”  This leaves the Fed with the tricky task of justifying additional rate increases despite a slowing economy.  In eurozone news, the European Central Bank reported inflation risks owing to strong money supply growth have become much “clearer” over the past two years.  Data released in the eurozone today saw May EMU-12 HICP climb 2.5% y/y, unchanged from provisional estimates and the ECB noted EMU-12 house prices were up 7.6% in 2005, up from 7.2% in 2004.  On a core basis, core inflation was up 1.3% y/y in May, down from April’s 1.5% level.  Most traders believe the ECB will continue to tighten monetary policy through the course of the year. The ECB today added “…key ECB interest rates are still low by historical standards, liquidity is ample and monetary policy remains accommodative…while the moderate evolution of labour costs in the euro area is expected to continue in 2007...indirect effects of past oil price increases and the announced changes in indirect taxes are expected to have a significant upward effect on inflation.”  Euro offers are cited around the US$ 1.2775 level.

¥/ CNY

The yen gained marginal ground vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥114.65 level and was capped around the ¥115.20 level.  Technically, today’s intraday high was just above the 61.8% retracement of the move from ¥118.85 to ¥109.00.  Bank of Japan Governor Fukui reported the reduction of current account deposits held by BoJ is nearly complete, part of the central bank’s decision to end its long-standing quantitative easing policy on 9 March.  Fukui, however, reiterated the conclusion of this reduction has nothing to do with raising interest rates from their near zero per cent level and added any rate hike must correlate with prices and economic data.  BoJ’s Policy Board voted to keep rates unchanged overnight and maintained its assessment of the economy, noting the economic recovery is intact.  Data released in Japan today saw the April leading index upwardly revised to 54.5 from 50.0 while the April tertiary index was up 1.3% m/m.  The Nikkei 225 stock index climbed 1.13% to close at ¥14,470.76.  Dollar bids are cited around the ¥113.95 level.  The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥145.20 level and was supported around the ¥144.80 level.  The British pound and Swiss franc moved higher vis-à-vis the yen as the crosses tested offers around the ¥212.70 and ¥93.50 levels, respectively.  The Chinese yuan weakened vis-à-vis the U.S. dollar as the greenback closed at CNY 8.0015 in over-the-counter trade, up from CNY 8.0005, and at CNY 8.0003 in exchange-traded activity.  Data released today saw January – May urban fixed-asset investment increase +30.3% while May actual foreign direct investment was off 7.86% y/y.  People’s Bank of China’s Zhou today said the central bank may make some “slight” adjustments to macroeconomic policy. 

₤

The British pound extended yesterday’s gains vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.8545 level and was supported around the $ 1.8415 level.  Technically, today’s intraday high was just above the 76.4% retracement of the move from $2.0035 to $1.3680.  Data released in the U.K. today saw May retail sales climb 0.5% m/m, consistent with forecasts, and were up 4.0% y/y.  This is the first time since December that retail sales have improved for four consecutive months and is important because retail sales account for about one-third of total household spending.  RICS reported U.K. May house prices jumped at their fastest pace in some two years.  Cable offers are cited around the $1.8595 level.  The euro came off vis-à-vis the British pound as the single currency tested bids around the ₤0.6815 level and was capped around the ₤0.6840 level.

CHF

The Swiss franc appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.2255 level and was capped around the CHR 1.2340 level.  Technically, today’s intraday’s low was right around the 38.2% retracement of the move from CHF 1.2015 to CHF 1.2405.  As expected, Swiss National Bank tightened monetary policy by +25bps today and will attempt to keep three-month LIBOR in the middle of its 1.00% - 2.00% target rate.  This represents the third rate hike in six months and most traders believe the SNB will also raise rates in September and December.  SNB Chairman Roth predicted Swiss GDP growth will ease to 1.5% - 2.0% in 2006 and added the SNB “must remain vigilant” against inflation. Dollar bids are cited around the CHF 1.2210 level.  The euro and British pound gained ground vis-à-vis the Swiss franc as the crosses tested offers around the CHF 1.5545 and CHF 2.2775 levels, respectively. 

AUD

The Australian dollar moved higher vis-à-vis the U.S. dollar today as the Aussie tested offers around the US$ 0.7405 level and was supported around the US$ 0.7365 level.  Data released in Australia today saw final Q1 PPI downwardly revised to 0.7% from 0.8%.  Reserve Bank of Australia is expected to release its monthly bulletin today. Australian dollar offers are cited around the US$ 0.7450 level.

CAD

The Canadian dollar lost ground vis-à-vis the U.S. dollar today as the greenback tested offers around the C$ 1.1165 level and was supported around the C$ 1.1120 level.  Technically, today’s intraday high was above the 61.8% retracement of the move from C$ 1.1275 to C$ 1.0925 level.  U.S. dollar offers are cited around the C$ 1.1190 level.

NZD

The New Zealand dollar was little-changed vis-à-vis the U.S. dollar today as the kiwi tested offers around the US$ 0.6240 level and was supported around the US$ 0.6205 level.  New Zealand dollar offers are cited around the US$ 0.6270 level.

Gold/ Silver

Gold continued vis-à-vis the U.S. dollar today as the yellow metal tested offers around the US$ 576.40 level and was supported around the $554.55 level.  Technical buying was cited earlier in the day and the U.S. dollar’s move lower also contributed to gold’s move higher, as did strong eurozone inflation data.  Silver moved higher vis-à-vis the U.S. dollar as the pair tested offers around the $10.24 level and was supported around the $9.51 level. 

Crude Oil

Crude oil gained ground vis-à-vis the U.S. dollar today as light, sweet NYMEX crude futures for July delivery tested offers around the US$ 70.02 level and was supported around the US$ 69.23 level.  Traders expect strong demand from U.S. consumers this summer during the holiday period, about one-quarter of Nigeria’s output production is stopped on account of Nigerian militants, and Iran has yet to formally respond to the West’s proposal regarding suspension of Iranian nuclear ambitions.