9 August 2006
Wednesday

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$ 1.2900 figure and was supported around the $1.2765 level.  Technically, today’s intraday low was just below the 61.8% retracement of the move from $1.3480 to $1.1640 and today’s intraday high was right around the 61.8% retracement of the move from $1.3665 to $1.1640.  The common currency moved higher after traders reacted to yesterday’s Federal Open Market Committee decision to keep the federal funds target rate at 5.25%.  The Fed reported “Economic growth has moderated from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices. Readings on core inflation have been elevated in recent months, and the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting contained inflation expectations and the cumulative effects of monetary policy actions and other factors restraining aggregate demand. Nonetheless, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.” The dissenting policymaker was Richmond Fed President Lacker who voted for a +25bps increase in the fed funds target rate.  The markets were volatile in the period after the FOMC’s interest rate decision was announced.  Some traders believe the Fed’s statement coincides with the end of the Fed’s long-standing rate-tightening cycle while others believe the Fed may raise borrowing costs further, especially with inflation still an issue.  To this end, dealers will pay close attention to the consumer price inflation data due on 16 August. Data released in the U.S. today saw June wholesale inventories climb 0.8% while sales were up 1.4%.  In eurozone news, traders await the release of the European Central Bank’s monthly bulletin tomorrow.  Euro bids are cited around the US$ 1.2780 level.

¥/ CNY

The yen gained marginal ground vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥114.80 level and was capped around the ¥115.75 level.  Technically, today’s intraday low was just below the 23.6% retracement of the move from ¥117.85 to ¥113.95.  Data released in Japan today saw June machinery orders climb 8.5% m/m, more-than-expected.  The big events in Japan this week include the June quarterly GDP data that are expected on Friday and comments from Bank of Japan Governor Fukui after Bank of Japan’s Policy Board deliberates interest rates.  The Nikkei 225 stock index climbed 1.24% to close at ¥15,656.39.  Dollar bids are cited around the ¥114.40 level.  The euro moved higher vis-à-vis the yen as the single currency tested offers around the ¥148.25 level and was supported around the ¥147.60 level.  The British pound moved lower vis-à-vis the yen as sterling tested bids around the ¥219.15 level while the Swiss franc moved higher vis-à-vis the yen as the pair tested offers around the ¥94.25 level. The Chinese yuan depreciated vis-à-vis the U.S. dollar as the greenback closed at CNY 7.9772 in the over-the-counter market, up from CNY 7.9732, and at CNY 7.9764 in the exchange-traded market. People’s Bank of China released its Q2 monetary policy today and indicated there are a “basket of policies” that can be used to resolve China’s balance of payments problems, and not just the yuan exchange rate.  "With a capital and current account surplus, it's difficult to control the growth of fast credit,” PBOC noted.  Data released in China today saw the July trade surplus print at a record US$ 14.61 billion and a government think tank now predicts China’s 2006 trade surplus will print at US$ 146 billion.

₤

The British pound moved higher vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.9110 level and was supported around the $1.8970 level.  Technically, today’s intraday low was just above the 76.4% retracement of the move from $1.9550 to $1.7045.  Data released in the U.K. today saw REC wage inflation escalate to a fifteen-month high in July.  Bank of England’s quarterly inflation report was released today and traders perceived it to be less-hawkish-than-expected.  BoE Governor King indicated there is a 50% chance that consumer price inflation will reach 3% over the next six months.  Market forecasts expect interest rates to be around 4.90% at the end of 2007 and 5.0% by the middle of 2008.  Minutes from last week’s Monetary Policy Committee meeting will be closely scrutinized to see how closely the vote was to raise rates.  Other data released in the U.K. today saw the June trade in goods deficit narrow to -₤6.5 billion from ₤7.0 billion.  Cable bids are cited around the $1.8960 level.  The euro gained ground vis-à-vis the British pound as the single currency tested offers around the ₤0.6755 level and was supported around the ₤0.6720 level.

CHF

The Swiss franc appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.2205 level and was capped around the CHF 1.2330 level.  Technically, today’s intraday high was just below the 38.2% retracement of the move from CHF 1.1920 to CHF 1.2595.  The Swiss SECO consumer climate index will be released tomorrow.  Dollar offers are cited around the CHF 1.2330 level.  The euro moved higher vis-à-vis the Swiss franc as the single currency tested offers around the CHF 1.5760 level while the British pound moved lower vis-à-vis the Swiss franc and tested bids around the CHF 2.3305 level.

AUD

The Australian dollar gained ground vis-à-vis the U.S. dollar today as the Aussie tested offers around the US$ 0.7665 level and was supported around the $0.7565 level.  Data released in Australia today saw June housing finance by volume climb 1.3% m/m.  Australian dollar offers are cited around the US$ 0.7700 figure.

CAD

The Canadian dollar gained ground vis-à-vis the U.S. dollar today as the greenback tested bids around the C$ 1.1170 level and was capped around the C$ 1.1250 level.  Data released in Canada today saw July housing starts climb 236,500, above June’s 236,400 pace.  Technically, today’s intraday low was about twenty points below the 50% retracement of the move from $1.0925 to $1.1455.  U.S. dollar offers are cited around the C$ 1.1255 level.

NZD

The New Zealand dollar moved higher vis-à-vis the U.S. dollar today as the kiwi tested offers around the US$ 0.6315 level and was supported around the $0.6220 level.  New Zealand dollar offers are cited around the US$ 0.6410 level.

Gold/ Silver

Gold notched strong gains vis-à-vis the U.S. dollar today as the yellow metal tested offers around the US$ 654.76 level and was supported around the $635.20 level.  Speculation that the Federal Reserve’s rate tightening cycle may have ended and speculation that Bank of Japan, the European Central Bank, and Bank of England may lift borrowing costs later this year led to the pair’s gains.  News that Israel decided to broaden its offensive in Lebanon also have traders buying gold. Silver moved higher vis-à-vis the U.S. dollar as the pair tested offers around the $12.58 level and was supported around the $11.92 level.

Crude Oil

Crude oil gained ground vis-à-vis the U.S. dollar today as light, sweet NYMEX crude oil futures for September delivery tested offers around the US$ 77.19 level and was supported around the $ 76.31 level.  Supply concerns related to British Petroleum’s decision to close its Prudhoe Bay production facility in Alaska are keeping the pair bid, as is the continuing fighting between Israel and Hezbollah.  Traders await today’s weekly U.S. crude and gas inventories data.