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Monday October 25, 2004 - 21:21:17 GMT -

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Forex: 105 Seen To Be The Pain Threshold for the Japanese

DailyFX Forex Fundamentals 10-25-04

By Kathy Lien, Chief Strategist of

- Euro rallies as German business confidence index (IFO) increases unexpectedly
- US existing home sales increase 3.1%
- 105 Seen To Be The Pain Threshold for the Japanese


The euro continues to scream higher after having increased 3% against the US dollar over the past week. The single currency shook off the first inkling of concern from Eurozone officials. This morning ECB Weber from Germany and Junker from Luxembourg said that there may be a “few problems” if the euro continues to rise. However their comments are more likely to be pointed responses to speculation instead of core concerns at this point because Weber did acknowledge that the rise in the euro reduces the inflationary pressures brought on by high oil prices. Providing further reason for the euro’s rally today was the unexpected improvement in the German IFO business sentiment survey. In the statement, IFO President Hans-Werner Sinn said that, “The economic recovery continues, albeit without the dynamics of previous upswings.” The current assessment component declined while the expectations component improved. Less pessimistic sentiment in the exporting, retailing and construction industries prevented the index from declining once again, like the market had anticipated. However, the improvement is likely to be short lived if current German fundamentals do not change. With the unemployment rate at a five year high, IFO’s Sinn says that the employment “outlook is still unfavorable.” Higher oil prices and a weak labor market continue to keep domestic demand depressed, while the euro’s rise threatens export growth.


Dollar weakness is the predominant theme in the currency markets today. The movements in the majors (euro, pound, yen and swiss franc) are getting very extended at this point. Based upon our proprietary FXCM Speculative Sentiment Index (SSI), the rally that we have seen over the past 24 hours is primarily driven by short covering. Over the past 24 hours, open interest in the euro has fallen close to 20%. As we mentioned in this morning’s market points, there are 3 major factors driving the dollar’s decline 1) the current account deficit 2) oil prices and 3) uncertainty surrounding US elections. According to a Bloomberg survey conducted last Friday, 63% of traders polled turned bearish on the dollar. With comments from Fed officials suggesting that they are not against the dollar’s decline and Eurozone government officials not expected to enact jawboning against the euro’s rise until the pair is above 1.30, there is nothing standing in the way of further gains in the euro. The only possibility of a retracement is if we see much stronger than expected US data, more specifically stronger durable goods and GDP. Meanwhile US existing home sales increased 3.1% to 6.75 million in December. This is a continuation of last week’s stronger than expected housing market data. There are no signs of slowing in the industry quite yet, though home buyers may be scrambling to lock in mortgages before another anticipated rate hike later this year.


Led by dollar weakness, the British pound continues to churn higher. Like the euro, the rise in the pound helps to alleviate some of the inflationary pressure brought on by the rise in oil prices. This morning, Bank of England’s Lambert said that the central bank ‘will keep an open mind’ and carefully monitor inflation. Basically traders need to keep in mind that the most important uncertainty impacting the pound at this moment is whether the BoE will deliver one last rate hike this year. The market is somewhat divided although more skewed to the absence of any further rate hikes at this point. Factors that will change the direction that this scale tips will dictate pound related movements. Of course, since the market only has its eyes on the dollar right now, there could be further gains in the GBPUSD. The lack of any significant data this week does not help the pound in taking the reins.


The dollar is headed into dangerous territory against the Japanese yen as we get closer to the psychologically important 105 level. It is believed that 105 is the pain threshold of the Ministry of Finance. Over the past year, the last time that the Bank of Japan intervened to sell the yen was on March 16, 2004. At the beginning of their fiscal year in April, the MoF had let USDJPY slip to a low of 103.40 without intervening. However, besides the sharp dip surrounding the beginning of the fiscal year, the MoF has not let USDJPY slip below 105 over the past 12 months. So there is a high likelihood of physical intervention around that level. At this point, there continues to be rumors of price checking by the MoF, though actual intervention has yet to be seen. So far there has not been any notable spikes in the price action, which could be indicative of official buying. Japanese data released thus far this week have been negative for the Japanese yen. Nationwide department store sales fell –4.4% yoy in September, which is the seventh consecutive monthly decline. Japan is releasing their small business confidence survey tomorrow. Sentiment is also expected to decline modestly in September.


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