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Monday October 11, 2004 - 22:55:14 GMT -

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Forex: Dollar Could Rebound As Euro IMM Longs Reach Record Highs

DailyFX Forex Fundamentals 10-11-04

By Kathy Lien, Chief Strategist of

· Dollar Could Rebound As Euro IMM Longs Reach Record Highs
· Mixed UK Data - Trade Deficit Widens But Retail Sales Improve
· Oil Hits Another Record High For Fifth Consecutive Trading Session


Holidays in the US, Canada and Japan has resulted in a relatively quiet trading session. The euro spent the day retracing a portion of Friday’s gains driven by US non-farm payrolls, which was expected after such a significant rally. Interestingly enough, one of most talked about points this morning is the record high in long euro positions on the IMM. The net long positions held by speculators increased from 32,334 to an all-time high of 44,811 contracts. Although the snapshot was taken on October 5th, three days before the non-farm payrolls release, it is highly likely that a good portion of the same positions were retained immediately before the payrolls report given the lack of any notable price action between Oct 5th and Oct 8th. This extreme level of positioning is typically taken as a contrarian indicator and confirms our belief that the 1.2450 range high remains a tough hurdle for the euro to overcome. Meanwhile according to an German newspaper article, German government officials upgraded their 2004 GDP growth forecasts from a previous range of 1.5-2.0% to 2.0%, but expect growth to slow to 1.8% in 2005 on weakening exports. Slowing growth is a widespread concern globally (we will touch more on this in the USDCHF commentary) and the weaker perception of future activity as a result should be reflected in tomorrow’s ZEW survey.


With oil prices reaching another record high for the fifth consecutive trading session, there continues to be debates on how much of an impact the higher costs will have on the global economy. Some argue that oil prices are still low on real terms while others say that the ramifications are so astronomical that they are beginning to calculate the probability of a global recession occurring as a result. We believe that both camps are too extreme, yet we certainly lean closer to the latter argument. Oil prices have jumped close to 30% since September 8th while gasoline prices are up 8 cents a gallon over the past 2 weeks. We have seen a good number of well respected economists revise downwards their estimates for 2005 growth. If prices are sustained at current levels and thus reflected in winter heating bills, it could really sap consumer purchasing power. We are already seeing the currencies of net oil importers being punished by wider trade deficits or smaller trade surpluses. We saw it this morning in the pound and expect to see the same in the Japanese and US trade balances expected later this week. Higher energy costs taken in conjunction with a weak labor market report is a double blow for the American consumer. Data in the US this week is back loaded, so we expect more volatile trading at the end of the week.


This is a big week for the pound given the country’s heavy economic calendar. Data released earlier this morning was generally mixed. Producer prices for both inputs and outputs increased more than expected during the month of September while retail sales rebounded from 0.6% to 2.0%. Both of these reports are encouraging, but a growing trade deficit and softer house prices keep gains in the pound limited. Although higher producer prices have prompted some talk about the Bank of England not giving up yet on rate hikes, tomorrow’s retail and consumer price indices will be more important in detailing whether these higher producer costs have been passed onto consumers. As for house prices, the slowing trend should come as no surprise, since we have been seeing this for some time now. The trade deficit is wider with exports falling and imports the highest on record. Last month, the UK reported that they imported more oil than exported for the first time in 13 years. As a new net oil importer, surging oil prices have increased the costs or value of their imports and we expect that this played a major role in the unexpected widening of the trade deficit.


Japanese markets are closed for the National Health and Sports Day, which means that Japanese traders will not have had a chance to adjust positions based upon the weaker US non-farm payrolls report until tonight. This is a pretty busy week data wise for Japan. We are expecting the trade balance, industrial production, consumer prices, and consumer sentiment. The trade balance is expected to widen for the first time since June 2003 due to an expected fall in the merchandise trade surplus. The country’s notorious energy-dependence magnifies imports as oil prices continue to break the $50 threshold.


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