Wednesday October 27, 2004 - 21:22:22 GMT
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Forex: Dollar Rallies On Higher Than Expected Crude Supply
DailyFX Forex Fundamentals 10-27-04
· Dollar Rallies On Higher Than Expected Crude Supply
· Home Loan Approvals Continue To Fall In UK
· RNBZ Raises Rates By Quarter Point To 6.50%
After such an extended sell-off over the past two weeks, the dollar has been begging for a reason to rally. The surprisingly higher than expected crude stock report released from the Energy Department this morning provided a fundamentally justified cause for dollar bulls to latch onto. With oil being one of the major culprits for slowing growth globally, the first piece of substantially good news from the industry allowed the entire market to breathe easier, with oil prices puling back almost $3 a barrel. However optimism is likely to be short-lived as demand will rise into the winter season. Focusing more on the euro itself, ECB member Weber did acknowledge that there have been discussions about whether the euro’s rise has been driven by fundamentals and so far he attributes the rise to the US’ growing current account deficit and “inflexible” currencies in Asia. However, red flags have not been raised high yet as Portugal’s Constancio, who is also an ECB member said that the euro’s rise has been gradual. If you recall, in late 2003 / early 2004, there were a lot of complaints and concerns from EU and ECB officials about the euro’s rally. Yet it was not until ECB President Trichet warned about the “brutal moves” did the euro top out at 1.2930. Thus far, Trichet has declined to talk about the currency’s movements or show any signs of concern.
Mixed data in the US failed to dictate the dollar’s course and instead it was movements in oil that helped the greenback record solid gains. The much-anticipated US durable goods report created little fan fare. Orders for big-ticket items made to last more than three years increased a less than expected 0.2% in September. However, excluding the more volatile transportation products, durable goods orders rose 1.7%. The details of the report indicated that orders for non-defense capital goods increased 2.6% while shipments fell 1.2%. Housing market data continues to surprise the markets with new home sales increasing 3.7%. This follows the 3.1% rise in existing home sales reported on Monday. The housing sector has been hot as mortgage rates dipped on fears that higher oil prices will hurt growth. Meanwhile, the Fed’s Beige Book report also painted a mixed picture. The Fed reported that economic activity is continuing to expand with business spending picking up, permanent hiring becoming more frequent and firms becoming more able to pass costs to customers. However, they also noted that most areas were concerned that energy costs could hurt consumer and business spending. The market will be keeping its eyes peeled on Friday’s GDP report. The latest durable goods orders data supports solid third quarter GDP growth.
The British pound continued to slide for the second consecutive day as the dollar recouped some of its recent losses. This morning we received further evidence that home loan approvals fell for the third month in a row. Higher interest rates and falling property valuations have all been signs of the gradual deflation that is occurring in the housing market bubble. The trend is unlikely to reverse anytime soon. Tomorrow, we are expecting the GfK Consumer Confidence survey. Confidence is expected to remain depressed with the risk of worsening given the deteriorating global outlook.
The two-day consolidation in USDJPY is most likely a precursor to larger movements as we head into judgment day for Japan. Over the next 48 hours, we are expecting a lot of very important economic data including industrial production, retail sales, household spending, CPI, the jobless rate and the Bank of Japan’s semiannual outlook report. Industrial production is likely to be tempered by the rising cost of crude oil and is expected to have risen 0.4% in September. Industrial production may have already peaked this year in April with slowing export growth likely to have had an impact. Meanwhile September’s retail trade is expected to be -1.4%, indicating a decline from retail sales for the corresponding month in 2003. This slight improvement from August’s -1.8%, complements the BoJ’s quarterly consumer index data quite well. As the jobless rate fell to 4.8% in August, consumer’s responded with the highest confidence levels in 8 years. Between Q2 and Q3, BoJ’s survey revealed an increase in the confidence index from -14.9 to -10.4. Despite this, the fact that the data is still negative implies that spending (and therefore, sales) will increase, but remain weak nonetheless, which is reflected in economists’ expectations for this month’s retail sales.
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