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US Dollar
It has been quite a day for the dollar today as it soared against the majors. The strength of the day’s numbers gave dollar bulls the conviction to push forward. The massive amount of money flowing into the US and growing consumer prices alleviated two major fears that traders have at the moment. The record Treasury International Capital flow report of foreign purchases pushed the issue of a growing trade deficit further into the closet of worries as we see more than sufficient demand for dollar denominated assets flood into the country. With $101.9 billion of net foreign purchases reported in September, inflows hit a record high. So even though we have two records set in September, it was a net positive for the dollar. Rising interest rates and the economy’s resilience after Katrina helped to boost investor confidence at a critical time and the results are in – it will be difficult to undermine the significance of this flow, especially since central banks were on a buying spree once again, with both Japan and China snapping up more dollars. The biggest demand was for US corporate stocks and bonds. In terms of inflation, weaker core prices reported yesterday did not filter into weaker consumer prices. October headline and core consumer prices both rose 0.2 percent. The rise comes even in the face of falling gasoline and energy prices. The longer inflationary pressures remain prevalent, the stronger the need for more rate hikes. Yet not all news was good news today. Mortgage applications fell 0.6 percent over the past week, but more surprisingly, the NAHB housing index plunged from 68 to 60 in November. This is a clear consequence of higher rates. Rising mortgage costs is causing the sentiment of builders in the housing market to turn sour. Meanwhile volatility will probably not settle until Friday. Tomorrow, we are still expecting industrial production and the Philly Fed survey.

Euro
Weakness continues in the Euro as the market speculates about the possibility of a December rate hike by the ECB. According to various press reports, it seems that even the European Central Bank may not know their next step. There appears to be a lot of dissent within the monetary policy committee and in our opinion, a December rate hike is not likely. The Euro still remains under significant pressure primarily from broad dollar strength. The sprinkling of data today did little to shift sentiment. Consumer prices for the month of October accelerated modestly, which validates the ECB’s concern. French non-farm payrolls rose less than expected but wages jumped by 1 percent. Over the next few days, there is little standing in the way of the dollar so it will really be a battle of whether bulls will finally capitulate and let the Euro slide down to 1.15 or fight to the bitter end, making range trading the predominant theme. British Pound The British pound was the biggest market mover today, falling 1.1 percent or 232 pips against the dollar, which is the lowest level that we have seen in over 2 years. The numbers just seem to be getting worse across the pond with the number of claimants rising to 12.1k from an upwardly revised 10.7k. The growth of average earnings including bonuses slowed to 4.1 percent from 4.2 percent. Basically what we are seeing is more people out of work while wage growth overall is slowing. The Bank of England’s Quarterly Inflation report was the real killer though. The central bank cut both its growth and inflation forecasts, with inflation predicted to slip below their 2 percent target in the middle of next year. This keeps alive the possibility of another interest rate cut by the BoE. Fears that the growing interest rate gap would be coming from two directions has put extensive pressure on the pound and unless data begins to turn up, we expect this to remain the case. Tomorrow’s retail sales report is another important release to see if we reach even further lows in the GBPUSD.

Japanese Yen
The Japanese yen broke another two year high today before giving back some of its gains. Like the UK, the future of interest rates is also dictating the movements in USDJPY. Although the Bank of Japan has repeatedly prepped the markets on the possibility of tighter monetary policy and higher rates in the foreseeable future, Prime Minister Koizumi, who rarely makes comments on monetary policy said that he believed it was “too early” to end the Bank of Japan’s quantitative easing policy. This political pressure will certainly be another cause for consideration that the central bank has to deal with. As the USDJPY continues to grind higher, the possibility of a government intervention remains unchanged. A stronger yen poses a big risk to the country’s export dependent economy, but a weaker yen is stimulative and actually may even boost domestic demand by keeping spending at home. According to a newspaper poll, a survey of Japanese analysts report that a turn amongst that crowd is not expected until the central bank actually ends their quantitative easing policy. In our opinion, waiting for the Japanese to make a move is like waiting at the line in the Department of Motor Vehicles – long and frustrating. Instead, the end of the Fed’s tightening cycle could have the same effect on USDJPY and could possibly come earlier.

The dollar declined overnight and in morning trading because of weaker than expected economic data. Heading into midday trading, the EURUSD pair was trading at 1.2137, up about 0.5 percent for the session as the USDJPY pair was trading lower at 115.25, down about 0.5 percent. Dollar weakness looked to be attributed to a weaker than expected durable goods orders and new home sales. Orders of durable goods showed a decline of 2.1 percent caused by a decline in the demand for commercial aircraft. The market consensus was estimated at a decline of only 1.5 percent. Additionally, new homes sales in September rose to 1.222 million units up about 2.1 percent from 1.197 million. While the increase shows rebounding from August’s plunge, the figure was still lower than expectations of 1.25 million.

The U.S. equity markets opened lower on the morning. At 11:00 AM ET, the Dow Jones Industrials traded lower at 10,300, down 45 points or 0.44 percent. The NASDAQ showed loses as well, trading at around 2,084, down about 15 points or 0.73 percent. The S&P 500 index slipped about 4 points or 0.35 percent, trading at 1,187. Some notable movers in early morning trading were Exxon Mobile, General Motors Corp, and Verizon. Exxon Mobile shares increased 0.73 percent due to an increase in earnings over the past year. Exxon Mobile reported earnings of 9.92 billion (1.58 per share) for the third quarter, up from 5.68 billion (0.88 per share) in the previous year.

Separately, General Motors shares plunged about 5 percent after the SEC subpoenaed data regarding their accounting practices. GM has denied rumors of the company filing for Chapter 11 bankruptcy. .

The US bond market gained in overnight and early morning trading as yields on the 10-year dipped 0.04 percent to 4.55 percent. Fears from General Motors and weak economic data provided some relief to the bond market as investors found safety in greenback treasuries.

The U.S. dollar fell against its Japanese counterpart on Monday, following comments hinting at further appreciation of the Chinese yuan and by proxy, the region’s benchmark, the yen.

China’s Yu Yongding, who heads the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, said yuan appreciation was inevitable over time, but that changes would likely be gradual, according to analysts’ reports citing those comments.

U.S. officials have welcomed China’s initial steps but have stressed in recent comments the need for more reform. On July 21, China dropped a decade-old yuan-dollar peg, a mechanism in place to keep Chinese-made goods more competitive. Since then, net yuan appreciation has been minimal, with the currency trading within a daily band against a basket of the world’s leading currencies.

The comments alone weren’t that newsworthy, analysts said. Rather, they provided the catalyst many in the foreign-exchange market were looking for to trigger dollar selling after the U.S. currency hit a wall of option-related resistance above 116 yen.

The dollar’s probe of this key area last week marked its highest yen level in some two years.

In morning North American trade, the dollar fell 0.2% to 115.64 yen compared to 115.85 yen.

The dollar was a touch firmer against its chief European counterparts Monday, underpinned by ongoing expectations for higher U.S. interest rates.

At the same time, most analysts said the dollar has gotten about all the mileage it can out of interest-rate bets absent fresh data or commentary to suggest the Fed will extend even further its campaign to nudge U.S. rates higher.

Higher rates in the U.S. relative to much of the rest of its industrialized counterparts affords dollar-denominated investments a yield advantage appealing to foreign investors.

Yield plays combined with the repatriation of foreign profits by U.S.-based multinational companies have tended to support to the dollar. Offsetting those inflows are reports that more central banks are lightening up some of their dollar reserves and adding other currencies, primarily the euro.

At last check, the dollar was up 0.1% against Europe’s shared currency; the euro was changing hands tat $1.1942 compared to $1.1945 late Friday.

Euro-dollar has largely consolidated since hitting three-month lows below $1.19 earlier this month.

The greenback nosed up 0.1% against its British counterpart; one pound was worth $1.7670 compared to $1.7681 Friday.

This story was supplied by MarketWatch. For further information see www.marketwatch.com.

Technical Overview Thursday, 20 October 2005

·Euro Rebounds From 2005 Low
·Swiss Franc Defends 2005 High
·New Zealand Dollar Remains In Tight Range

Trader’s Outlook:

Market remains in a range trading mode as the latest price action suggests that the retrace that is in the works will most likely to occur in the upcoming week with the dollar bulls waiting on the other side of the move to take advantage of the unsuspected traders. A longer term view remains in favor of the greenback as the multi-year trend just stated and the next large move will most likely see the 2003 levels come into play once again.

EUR/USD – Euro bulls went on a full out offensive against the advancing greenback longs as the pair approached the 2005 low at 1.1866. A reversal of fortunes for the euro longs will most likely see the pair head above the psychologically important 1.2000 handle, with a further move to the upside testing the dollar defenses above the 1.2100 handle at 1.2122, a level marked by the October 17 daily high. A sustained momentum will most likely see the pair head higher and take on the greenback offers around 1.2253, a 23.6 Fib of the 1.3477-1.1869 USD rally. Indicators remain supportive of the dollar longs with both momentum indicator and MACD treading below the zero line, while neutral oscillators give either side enough room to maneuver.

USD/JPY – Japanese Yen longs continued to trade sideways as the pair remained in the vicinity of the new 2005 high at 115.99 after the dollar bulls failed to push the pair toward 116.67, a level marked by the July 15, 2003 daily low. A further move to the upside will most likely see the dollar longs push the yen bulls toward the 117.70, a September 15, 2003 daily low. However a break below the psychologically important 115.00 handle will most likely see the pair head lower and test the greenback defenses around 113.99, a level established by the 20-day SMA. Indicators remain supportive of the dollar longs with both momentum indicator and MACD treading above the zero line, while overbought Stochastic gives the yen longs a chance to retaliate.

GBP/USD – British pound bulls managed to retaliate against the attacking dollar longs after the greenback failed to test the cable’s defenses around 1.7393, a level marked by the October 12 daily low. As the price action switches gears and in short-term turns in favor of the cable longs a break above the 1.7624, a 20-day SMA will most likely see the pair head higher and test the dollar defenses around 1.7725, a 23.6 Fib of the 1.9219-1.7284 USD rally. Indicators remain supportive of the dollar longs with both momentum indicator and MACD treading below the zero line, while neutral oscillators give either side enough room to maneuver.

USD/CHF – Swiss Franc longs managed to stop the greenback advance in its tracks as the pair was pushed against the 1.3081, a level marked by the 2005 high. A reversal form this point will most likely see the Swiss Franc longs push the pair toward the 1.2901, a level marked by 20-day SMA. A further move to the downside will most likely see the Swissie take on the greenback defenses around 1.2797, a level established by the October 17 daily low, with sustained momentum seeing the pair take on the greenback bids around 1.2703, a level established by the 23.6 Fib of the 1.1492-1.3085 USD rally. Indicators remain supportive of the dollar longs with both momentum indicator and MACD treading above the zero line, while neutral oscillators give either side enough room to maneuver.

USD/CAD – Canadian dollar bulls once again managed to push the US dollar counterparts below the 1.1800 handle as the tug-of-war between the neighbors continued with the price action remaining confined to a narrow trading range. As the greenback longs manage to take back the control of the pair, the next move above the 1.1800 figure will most likely see US dollar longs take on 1.1862, a level marked by the 23.6 Fib of the 1.2730-1.1592 CAD rally, which is further reinforced by the 50-day SMA at 1.1836. A sustained momentum the upside will most likely see the greenback take on the Loonie defenses around 1.2028, a 38.2 Fib of the 1.2730-1.1592 CAD rally. Indicators are diverging with momentum indicator above the zero line while negative MACD is sloping upward toward the zero line; with neutral oscillators giving either side enough room to maneuver.

AUD/USD – Australian dollar bulls managed to push back the greenback longs as the pair head back up toward the psychologically important .7500 handle following the inability by the US dollar counterparts to push the pair below. .7457, an Aussie defensive position established by the August 31 daily low. A sustained momentum on the part of the Australian dollar longs will most likely see the pair head above the .7500 and take on the US dollar defenses around .7555, a level marked by the October 5 daily low. However a reversal and move to the downside most likely see the greenback longs push their way toward .7368, a level marked by the 2005 Low. Indicators are favoring the US dollar bulls with both momentum indicator and MACD below the zero line while neutral oscillator give either side enough room to maneuver.

NZD/USD – New Zealand dollar bulls continued to do nothing as the pair remained in an extremely tight trading range as the Kiwi longs repeatedly failed to break the greenback defenses around .6883, a level marked by the 38.2 Fib of the .7468-.6681 USD rally. As the price action switches sides in favor of the US dollar longs, a move to the downside will most like see the greenback test the New Zealand dollar defenses at .6868, a level marked by the 23.6 Fib of the .7468-.6681 USD rally. A further collapse of the Kiwi’s defenses will most likely see the pair head toward the .6773, a New Zealand dollar defensive position established by the July 28 daily low. A sustained momentum on the part of the greenback longs will most likely see the pair test the 2005 low at .6685. Indicators are diverging with momentum indicator above the zero line while negative MACD is sloping upward toward the zero line, while neutral oscillators give either side enough room to maneuver.

Monday, 17 October 2005

Written by Daily FX Research Team
Sterling hit a 10-day high against the dollar as data showed that British house prices rose for the first time in six months between mid-September and mid-October. At 07:35 GMT, the pound sterling traded at $1.7660, after rising to $1.7734 earlier in the session. It was a touch weaker versus the euro at 68.35 pence. The pound got a boost last week from comments viewed as slightly hawkish by Bank of England Governor Mervyn King and Monetary Policy Committee members Paul Tucker and David Walton.

British traders have little data to trade upon on Monday as the RICS House Balance is the only release for today. Tuesday’s trading will be paced by significant inflation numbers. UK consumer price index will be a major release. The consensus expects CPI growth to slow from 0.4% to 0.3% for the month of September.

London’s equities markets moved higher on Monday as rising oil prices boosted the heavily-weighted energy sector. The FTSE 100 started the session 0.3 percent higher at 5,288.6 and the FTSE 250 rose by the same margin to 7,646.7. BP rose 2.5 percent to 629.0p and Royal Dutch Shell was 1.6 percent higher at £18.33. Other energy stocks also made gains, BG Group was 1.8 percent stronger at 492.5p, Burren Energy was 0.7 percent stronger at 765p and Tullow Oil was 1.8 percent higher at 232.3p.

Man Group, the hedge fund operator, denied that it was preparing a bid to acquire Refco, its US peer teetering on the brink of collapse after a cash crisis, following weekend press reports that the FTSE 100 constituent was considering buying part of the American company. Shares in Man started the day up 0.9 percent at £15.56.

Uncertainty over tomorrow’s inflationary figures controlled the U.K. fixed income market today. As a result the yield on the benchmark 10-year gilt fell 2 basis points to 4.39 and its price, which moves inversely to the yield, rose to 102.85.

Friday, 14 October 2005
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Written by Richard Lee, Currency Analyst
Rising earlier on, the USDCHF currency pair declined on the session after disappointing consumer price inflation data for the world’s largest economy was released. After hitting the intraday high of 1.2943, the currency pair now trades at 1.2823, below the 1.2890 close of yesterday’s session late in New York. Key economic data anticipated by the market surprised to the downside today with consumer prices and confidence reports on the docket along with data on industrial production. For the month of September, inflationary pressures increased 1.2 percent on the headline figure. However, excluding the volatile food and energy components, underlying inflation remains relatively tame as the lower core figure confirmed the contributions of rising energy prices on the overall figure. Additionally, advance retail sales rose 0.2 percent in the month of September. However, excluding a tumble in auto sales, the core retail figure rose 1.1 percent, additionally reflective of higher oil prices. Separately, industrial production for the world’s largest economy dipped 1.3 percent against a consensus 0.4 percent dip with consumer confidence mildly shaken, down to a 75.4 reading from the previous 76.9.

Stocks on Wall Street were generally higher after General Electric reported strong profit growth for the quarter and smaller inflationary pressures alleviated interest rate considerations, albeit momentarily. The Dow Jones Industrial Average rose 0.2 percent to 10,239.80 while the S&P 500 index added 0.4 percent to 1,181.03. Subsequently, the Nasdaq composite was higher by 0.2 percent at 2,051.75. Rising 15 percent, quarterly profits for General Electric rose on higher demand for its wide array of products along with a stake in a mortgage and life insurance company. As a result, investors bid shares higher by 1 percent to $34.36.

Fixed income markets fell for the fourth consecutive day as traders witnessed inflation rise the most in 25 years on climbing energy prices. As a result, spurred by further interest rate hike considerations, the 10-year benchmark note rose 5 basis points to 4.52 percent as the face value fell $5 to 97 37/32.