Thursday May 13, 2004 - 22:43:08 GMT
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Dollar Strengthens as Producer Price Growth Accelerates
EURUSD drifted lower during the US session as the market digested a mixed batch of US data. While retail sales came in lower than expected (mainly due to reduced auto sales), record oil prices and accelerating producer prices continued to drive expectations of a Fed rate hike by this summer. April producer prices printed at 0.7% percent month-on-month, significantly higher than the 0.3% consensus estimate. Producer price growth has been steadily accelerating since February, led higher by surging energy prices. EURUSD kept a bid tone ahead of options expiries at 10am in New York, rising above 1.1850 before falling to an intraday low of 1.1770 shortly thereafter. Notably, above consensus Q1 GDP readings in Italy and Germany provided little support for the euro in London and into New York, possibly due to a lack of evidence of growing domestic demand in either GDP report.
The upside surprise in PPI led USDCHF higher in New York as the pair traded through 1.30 and made a run at 1.31 before coming off to around the 1.3020 level. Geopolitical event risk notwithstanding, CHF could remain offered against USD given the growing perception of Fed rate hikes sooner rather than later, fueled by higher inflation data; the market will be looking to Fridayís CPI numbers for confirmation. In an agreement with the EU, non-member Switzerland acquiesced to help facilitate EU resident savings taxation in exchange for a guarantee of Swiss banking secrecy. This compromise opens the way for Switzerland and the EU to begin preparations to sign a series of bilateral treaties involving taxation, trade, security and education.
In the Asian and London sessions, GBPUSD gave back much of its Wednesday gains inspired by strong UK employment data and a hawkish BoE inflation report, while in New York, cable traded in roughly a 50-pip range, falling to a low of 1.1750 in the wake of the US PPI report before drifting higher to the 1.7620 level during the afternoon. With both central banks expected to tighten monetary policy, GBPUSD could remain range bound to lower medium term, given the marketís view of an earlier moving Fed. Stronger than expected CPI Friday could accelerate the trend downward, although all-time highs in crude oil and deteriorating US equity markets complicate the picture somewhat. The implicit gas tax on consumers and disappearing wealth effects from rising stocks at present preclude the need for rapid tightening.
USDJPY traded higher in London before consolidating during the New York session. The pair remained range bound between 114.20 and 114.70, trading near the top of the range by the end of day. Earlier in Japan the yen was dragged down by significantly weak machinery orders in March. While the market expected a reading between 4% - 5%, authorities reported a 3.2% drop, the second monthly fall in three months. The outlook for orders looks no less bleak as the government forecast a 3% drop-off this quarter. In light of Chinaís move to slow down its economy, Asian asset sales are becoming a predominant theme, helped along by record oil prices. Pressure on the yen further increased as the Nikkei sold off by nearly 3%. Traders will look to bid the dollar higher if Japanese equities continue to underperform. Next week sees the release of Q1 Japanese GDP.
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