14 March 2006

Fundamental Outlook at 1500 GMT (EST + 0500)

€

The euro slumped vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.1940 level and was unable to get above the $1.1985 level.  Technically, today’s intraday high is right around the 50% retracement of the move from $1.1640 to $1.2325.  San Francisco Fed President Yellen spoke last night and said the U.S. economy “is in pretty good shape” and added the labour market “is close to full employment,” noting there have been no indications of wage pressures.  She cautioned, however, that the Fed should “be sensitive to the possibility of overshooting” regarding continued rate hikes and predicted the economy will slow later this year.  Yellen also raised eyebrows by speaking about the adoption of an inflation target by the Fed, confirmed she would favour a target of 1.5% as measured by core personal consumption expenditures with a “comfort zone” between 1% and 2%.  She added an inflation target “could help to anchor the public's long-term inflation expectations from being pushed too far up or down, and thus help avoid both destabilizing inflation scares and deflations.”  The Fed is among the only major central banks in the world to not explicitly confirm a numerical inflation target, partially as a result of its tripartite mandate that focuses on economic growth, full employment, and low inflation.  Yellen’s comments may be amplified in the coming months by new Fed Chairman Bernanke who favours inflation targeting.  Bernanke testifies before Congress tomorrow.  Data released in the U.S. today saw headline February retail sales fall 1.3% while the ex-autos component was off 0.4%.  These data were worse-than-expected.  Also, the Q4 current account deficit printed at a record –US$ 224 billion, considerably more-than-expected and 21.4% more than Q3’s deficit.  Notably, the deficit reached a record 7.0% of GDP and for 2005 as a whole, the deficit was a record US$ 804.9 billion, some 6.4% of GDP.  These data will be scrutinized even further when the January Treasury International Capital portfolio flows data are released tomorrow.  The U.S. requires upwards of US$ 2 billion per day to finance its massive trade and current account deficits.  In eurozone news, Ecofin finance ministers informed Germany it has until the end of 2007 to reduce its deficit below 3% of GDP as required by the European Union’s Stability and Growth Pact.  EMU-12 finance ministers also reported the eurozone economy is “growing stronger” and this has been confirmed by the European Central Bank’s most recent rate hike.  The enduring question in traders’ minds is how much more the ECB is likely to tighten this year.  Data released in the eurozone today saw German ZEW investor sentiment post a surprising decline for the second consecutive month, printed at 63.4 in March, down from February’s 69.8 level and significantly below expectations.  Euro offers are cited around the US$ 1.2015/ 75 levels.   

¥/ CNY

The yen moved higher vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥118.20 level and was capped around the ¥118.75 level.  Stops were reached below the ¥118.40 level, representing the 23.6% retracement of the move from ¥108.76 to ¥121.40 and chartists are eyeing the ¥118.00/ 117.40 levels as downside targets.  One big story in Japan overnight involved comments from U.S. Treasury Undersecretary Adams who met with Japanese officials and said Japan should not “artificially” seek a weaker yen.  Data released in Japan overnight saw January industrial output climb a revised 0.4% m/m, upwardly revised from +0.3% m/m.  Other data saw February Tokyo-area condominium sales off 16.7% y/y while February corporate bankruptcies were off 0.4% m/m.  Minutes from Bank of Japan Policy Board’s 8-9 February meeting were released and confirmed policymakers discussed the establishment of an inflation target one month before last week’s decision to unwind its long-standing quantitative easing monetary policy.  Notably, the outstanding balance of current account deposits held by banks fell below the ¥30 trillion level today for the first time since 5 August 2005.  This reflects the central bank’s shift in policy last week and is expected to reach ¥6 trillion in a few months.  BoJ is expected to keep the uncollateralized overnight call rate around 0% through at least its next Policy Board meeting, scheduled for 10-11 April.  The Nikkei 225 stock index shed 0.75% to close at ¥16,238.36.  Dollar bids are cited around the ¥117.65 level.  The euro came off vis-à-vis the yen as the single currency tested bids around the ¥141.25 level and was capped around the ¥142.10 level.  Technically, today’s intraday high was right around the 76.4% retracement of the move from ¥143.60 to ¥137.10.  The British pound and Swiss franc depreciated vis-à-vis the yen as the crosses tested bids around the ¥205.10 and ¥90.10 levels, respectively.  The Chinese yuan gained ground vis-à-vis the U.S. dollar as the greenback closed at CNY 8.0476 in over-the-counter trading, down from CNY 8.0492, and closed lower at CNY 8.0473 in exchange-traded activity.  Chinese Premier Wen Jiabao spoke about the yuan exchange rate today saying “We will further build and strengthen the exchange rate system and we will expand the foreign exchange market and allow more flexibility in the fluctuation of the Chinese currency. It is no longer necessary for us to take a one-off administrative means to affect the fluctuation of the (yuan) exchange rate either upward or downward. There will be no more surprises.”  Chinese President Hu Jintao visits President Bush next month and there is considerable pressure on the Bush administration to label China a “currency manipulator.” Japanese Prime Minister Koizumi’s government today complained the yuan has only moved “in a limited range” since it was revalued on 21 July 2005. Data released in China today saw February retail sales climb 9.4% y/y.

£

The British pound gained ground vis-à-vis the U.S. dollar today as cable tested offers around the US$ 1.7370 level and was supported around the $1.7325 level.  Technically, today’s intraday low was right around the 23.6% retracement of the move from $1.7620 to $1.7230.  Sterling bulls are eyeing the $1.7380/ 1.7425/ 1.7470 levels.  The pair has now gained more than one big figure over the past 24 hours and traders await fresh U.K. data tomorrow including February employment data.  Cable offers are cited around the US$ 1.7435 level.  The euro came off vis-à-vis the British pound as the single currency tested bids around the £0.6880 level and was capped around the £0.6905 level.

CHF

The Swiss franc moved higher vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 1.3075 and was capped around the CHF 1.3125 level.  Technically, today’s intraday low is right around the 23.6% retracement of the move from CHF 1.2555 to CHF 1.3235.  Swiss National Bank’s interest rate decision is expected on Thursday and traders continue to monitor heightened geopolitical events involving Iran, Iraq, and Nigeria.  Dollar bids are cited around the CHF 1.3045 level.  The euro weakened vis-à-vis the Swiss franc as the single currency tested bids around the CHF 1.5660 level while the British pound moved higher vis-à-vis the Swiss franc and tested offers around the CHF 2.2780 level.

AUD

The Australian dollar moved lower vis-à-vis the U.S. dollar today as the Aussie tested bids around the US$ 0.7325 level and was unable to climb above the $0.7370 level, representing the 38.2% retracement of the move from $0.7485 to $0.7300.  Data released overnight saw the NAB February business confidence index rise to +15.0 from January’s +10.0 level.  Australian dollar offers are cited around the US$ 0.7395 level. 

CAD

The Canadian dollar weakened vis-à-vis the U.S. dollar today as the greenback tested offers around the C$ 1.1615 level and was supported around the C$ 1.1565 level.  Technically, today’s intraday low is about ten pips above the 38.2% retracement of the move from C$ 1.1975 to $1.1300.  Canadian February CPI data will be released on Thursday.  U.S. dollar offers are cited around the C$ 1.1640 level.

NZD

The New Zealand dollar extended recent gains vis-à-vis the U.S. dollar today as the kiwi tested bids around the US$ 0.6320 level after failing to get above the $0.6405 level.  Traders shorted the pair after the release of weaker-than-expected retail sales data were released.  Reserve Bank of New Zealand’s official interest rate remains at 7.25% and the central bank has suggested it does not plan to lower interest rates this year.  Chartists are eyeing the $0.6275 level as a downside target for the pair.  New Zealand dollar offers are cited around the US$ 0.6455 level.

Gold/ Silver

Gold appreciated vis-à-vis the U.S. dollar today as the yellow metal tested offers around the US$ 546.65 level and was supported around the $538.60 level.  The pair continues to consolidate after recently pulling back about US$ 40.00 from last month’s multi-decade high of $574.60.  Geopolitical turbulence and physical demand could keep gold bid in the near-term.  Silver gained ground vis-à-vis the U.S. dollar today and tested offers around the US$ 10.15 level and was supported around the $9.86 level.  Traders continue to wait for news regarding the SEC’s possible approval of a new silver-backed, exchange-traded fund.

Crude oil

Crude oil moved higher vis-à-vis the U.S. dollar today as front-month NYMEX futures tested offers around the US$ 62.15 level and were supported around the $61.25 level.  President Bush yesterday said Iran is supplying bombs to insurgents in Iraq and the U.S., U.K., and France will brief the United Nations Security Council today about Iran’s uranium enrichment activities.  Iran has basically shut the door on a Russian proposal to broker a compromise in the ongoing row.  Traders await tomorrow’s weekly U.S. inventories data and expect crude stocks to increase further from their current multi-year highs.  OPEC today said it wants to keep prices between the upper $50s and low $60s range per barrel.