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Tuesday October 12, 2004 - 21:54:34 GMT -

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Forex: Euro Weakens On Disappointing ZEW survey and French data

DailyFX Fundamentals 10-12-04

By Kathy Lien, Chief Strategist of

·Euro Weakens On Disappointing ZEW survey and French data
·Bearish Comments From BoE King and Softer Inflation Pressures Weighs On Pound
·Yen Weakens As China Says Speculation About Yuan Revaluation “Groundless”


Further evidence of the weakness in the Eurozone economy is once again surfacing. Germany reported a much weaker than expected ZEW survey this morning (31.3 versus 36 expected). Based upon the report, the analysts or experts surveyed by the ZEW expect the German economy to slow over the next 6 months. This slowdown will be brought on by the damaging impact of surging oil prices, weaker global demand, and the inability for the German government to invigorate domestic demand. Activity in the Eurozone as a whole is also expected to be more dismal, with the economic sentiment index for the region falling from 44.7 to 37.6. With the US economy hitting a soft patch and higher energy costs slowing growth worldwide, pessimism has increased quite a bit over the past few weeks. Meanwhile, France reported weaker industrial production and a wider trade balance. Although the widening of the trade balance was mainly due to an increase in energy costs, the size of the widening is still a primary cause for concern. Furthermore, industrial production fell 1.9% m/m, on the temporary closure of a big auto manufacturer, which contrasts with the market’s expectation for a +0.1% increase.


As we have expected, the dollar has since retraced over 50% of the losses that it incurred after Friday’s exceptionally weak non-farm payrolls report. The previous high of 1.2450 has proven to be a stiff level of resistance and as such the range remains intact ahead of the data scheduled for release on Thursday and Friday. Although many people are calling this the calm before the Thursday storm when we will then be inundated with the trade balance, import price index, PPI, retail sales, the Empire Manufacturing survey, industrial production, the University of Michigan consumer confidence survey and business inventories, we doubt that the data will be of sufficient enough catalyst (aside from maybe retail sales) to move the pair beyond its current range. Instead of particular interest will be Federal Reserve Chairman Alan Greenspan’s speech about oil on Friday afternoon. In the past few monetary policy statements, the FOMC has been made specific mention of oil prices and viewing its negative effects as transitory. However, it will be interesting to see whether the Chairman has his radars on alert now that oil has surpassed $50 per barrel.


The British pound retraced following a softer than expected consumer price inflation report issued for the month of September and modestly bearish comments from Bank of England Governor King. Consumer prices increased by 0.1% m/m and 1.1% y/y in September compared to the market’s expectation for a 0.4% and 1.4% respective increase. Heavy discounting in airfares, clothing and footwear has led to the softest pace of price acceleration since March of last year. Prices are growing at a slower pace in Britain than in the Eurozone. According to the statistics office, the Bank of England had access to the inflation data going into their monetary policy meeting on Thursday of last week. This means that their decision to keep rates on hold was probably a shoe-in. Meanwhile Bank of England Governor King said that the fall in the pound might have boosted inflation, which means that without the retracement in the pound, the fall in inflation could have been even worse. He also added that there are signs that the UK economy is in a ‘soft patch.’ This builds the case that the BoE is probably at the end of their tightening cycle.


After falling 200 pips in 2 days, the dollar retraced some of its losses against the Japanese yen. The correlation between the Japanese yen and oil prices has fallen apart recently. As oil surged over the past 2 days, the Japanese yen rallied against the dollar. Today, the Japanese yen rallied while oil prices dropped over a dollar per barrel. The retracement can be attributed partially to the comments from China. The State Administration of Foreign Exchange said on their website that the rumors of a yuan revaluation is “groundless and are a misunderstanding of our country’s current exchange rate policy.” We have previously cautioned about being too excited about China’s comments. They were simply a reiteration of former comments. Any revaluation or widening of the currency’s trading band would be a long drawn out process.


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