FOREX MARKET ANALYSYS

USD

The euro strengthened vis-à-vis the U.S. dollar today as the single currency tested offers around the US$ 1.3705 level and was supported around the $1.3635 level. Technically, today’s intraday high was just below the 23.6% retracement of the move from $1.3260 to $1.3850. As expected, European Central Bank kept its main refinancing rate unchanged at 4.00%. ECB President Trichet reported policymakers will act in a “firm and timely manner” to keep inflation below its 2.0% annual target ceiling rate. Trichet also added the ECB will “very closely” monitor price risks over the coming months, noted monetary policy remains on the “accommodative side,” and said policymakers have not ruled out additional tightening by the end of the year. Data released in the eurozone today saw German July manufacturing orders off 7.1% m/m. In U.S. news, the Federal Reserve injected US$ 31.25 billion in temporary reserves today, its latest attempt to provide additional liquidity to the credit markets. Data released in the U.S. today saw Q2 non-farm productivity upwardly revised to an annualized 2.6% growth rate from 1.8%, the highest level since Q3 2005. On the flip side of the coin, unit labour costs fell to their lowest level in one year, reduced to +1.4% from +2.1% and up 4.9% y/y. Anecdotal evidence from U.S. retailers were released today and suggested retail sales were solid last month. Other data released in the U.S. today saw the August ISM services index print at 55.8, unchanged from July’s print. Also, weekly initial jobless claims fell 19,000 to 318,000 while continuing jobless claims rose to 2.598 million. The Fed’s Beige Book was released yesterday and noted “limited” reports of financial markets problems affecting the general economy outside of real estate. Euro bids are cited around the US$ 1.3620 level.

¥/ CNY

The yen came off marginally vis-à-vis the U.S. dollar today as the greenback tested offers around the ¥115.55 level and was supported around the ¥114.80 level. The yen was pressured on traders found little impetus to unwind short yen carry trades. Many traders believe the decisions by major central banks this week to keep interest rates unchanged will pressure Bank of Japan’s Policy Board to keep borrowing costs unchanged for the time being. The most likely scenario probably involves a +25bps increase in the overnight call rate to +0.75% by the end of the year. Data released in Japan overnight cam August machine tool orders up 12.3% y/y. Also, capital flows data reported that foreigners sold a net ¥52.5 billion in Japanese bonds last week. The Nikkei 225 stock index gained 0.61% to close at ¥16,257.00. Dollar bids are cited around the ¥114.55 level. The euro gained ground vis-à-vis the yen as the single currency tested offers around the ¥157.90 level and was supported around the ¥156.75 level. The British pound and Swiss franc gained ground vis-à-vis the yen as the crosses tested offers around the ¥234.00 and ¥96.00 figures, respectively. The Chinese yuan appreciated vis-à-vis the U.S. dollar as the greenback closed at CNY 7.5384 in the over-the-counter market, down from CNY 7.5497. People’s Bank of China announced it will lift banks’ reserve requirements on deposits by 0.5%, effective on 25 September. Most traders believe PBOC will tighten monetary policy further this year and today’s action represented the seventh tightening this year. Chinese President Hu told President Bush China will liberalize the yuan further.