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Forex: Whipsaw Action In The Dollar Ahead Of Trade Data

DailyFX Forex Fundamentals 10-13-04

By Kathy Lien, Chief Strategist of

·Whipsaw Action In The Dollar Ahead Of Trade Data
·Italy Joins France And Germany In Reporting A Contraction In Industrial Production
·Fastest Wage Growth In The UK Since April 2002


Whipsaw action in the euro today could be related to adjustments of positioning ahead of tomorrow’s US trade deficit report. Taking a look at the earlier trade reports released from the Eurozone and the UK, the risk is for a more than expected widening of the trade deficit. Oil prices have played a major role in higher import balances for net oil importers and it is unlikely that the US will escape unscathed. The import index of the ISM manufacturing survey for the month of August also reported a fall imports. Meanwhile, weaker European data coupled with positive news on the flow front for the greenback has given the euro ample excuse to revert back to range trading. However, ahead of tomorrow’s data, further losses beyond the previous triangle breakout point have been limited. This morning, Italy became the latest country to report sharply weaker than expected industrial production in the month of August. Both Germany and France have both reported contracting production. A strong euro, higher energy costs and weak external demand for exports have taken a significant toll on the Eurozone’s manufacturing sector. For the time being, there is no clear respite for the Eurozone unless we see a fresh surge in US consumer demand. This also keeps the ECB’s hands tied and prevent them from joining their global counterparts in tightening monetary policy.


A Wall Street Journal article published this morning has helped to spur demand for the dollar in early US trading. According to the report, the new tax amnesty that just cleared the Senate and is headed for Presidential approval should attract a significant amount of repatriation of foreign earnings by US corporations. It goes onto say that corporations have parked up to $500 billion abroad. The bill reduces the tax on repatriated earnings from 35% to 5.25% and is only valid for one year. Dubbed the “American Jobs Creation Act of 2004," the intention is for corporations to repatriate earnings and invest in new ventures that would hopefully increase hiring. Either way, the tax rate proposed is very attractive and will certainly prompt many corporations to bring their foreign earnings back home, which would create a positive flow for the dollar.


One of the most anticipated releases from the UK this week was this morning’s labor market report. Although the number of claimants for unemployment fell by the smallest amount since June 2003, the absolute number of claimants is at its lowest level since July 1975. The unemployment rate remained unchanged at 2.7%, the lowest of the G7. Average earnings also increased from 3.8% to 3.9%, the fastest pace of growth since April 2002. Wage growth is worth monitoring since the Bank of England is keeping a close eye on the inflationary pressures brought on by the tight labor market. Central bank officials have previously mentioned that tight capacity is a primary concern for the Monetary Policy Committee. Short sterling futures rallied modestly on the report.


Mixed Japanese data has kept significant yen movements limited. The current account surplus narrowed from Y1633.4B to a better than expected Y1447.B while the seasonally adjusted current account surplus increased 25%. The market had expected a much sharper retracement given the recent rally in oil prices. The unexpected gains were sourced from increasing export activities by companies like Toyota. However, in contrast to the better trade data, industrial production increased by a less than expected 0.1% in the month of August according to the revised report. Moderating economies abroad has sapped a bit of export demand in recent months. Overall, according to the Bank of Japan’s monthly report, Japan’s economy “will continue to recover,” although the impact of higher oil prices does increase uncertainty. He also expects consumer prices to continue to decline. This is important ahead of tonight’s CGPI report. If you recall, the Bank of Japan has previously noted that they have no intentions to tighten monetary policy unless inflation increases consistently for a few months.


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