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Thursday October 28, 2004 - 20:43:00 GMT -

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Forex: Markets Scrabble to Assess Ramifications of China’s Surprise Rate Hike

DailyFX Forex Fundamentals 10-28-04

By Kathy Lien, Chief Strategist of

· Dollar Weakens On Labor Market Data
· UK Consumer Confidence Improves
· Markets Scrabble to Assess Ramifications of China’s Surprise Rate Hike


Traders craving for volatility this past summer should be quite content with today’s gyrating price action. The euro plummeted nearly 100 pips following China’s surprise rate hike only to reverse all of its losses and even register some additional gains on the back of weak US labor market data. China’s decision to raise interest rates for the first time in nine years from 5.31% to 5.58% was the talk of the market. The action was seen as apart of China’s proactive measures to slow growth. Although the actual affect of the 0.27% hike is, China’s announcement indicates that they want to ensure a soft landing and to curb inflation. Commodity prices, particularly steel and oil sold off as the market made adjustments to account for falling future demand. Although the decision is not shocking since the government has been taking measures to slow growth for some time now, the timing did catch the market off guard. The latest move is most likely a reflection of China’s attempts to appease external parties that may be exerting pressure on them to revalue their currency sooner than they may be prepared to do so. The euro recouped all of its losses in reaction to a weaker jobless claims report and help wanted index. Comments from ECB Garganas also helped to boost gains. In his opinion, the rise in the euro has not been “brutal” and will not have a “major effect” on growth.


More evidence of weakness in the US labor market has caused the dollar to do a full 360 degree turn in early US trading. Jobless claims increased 20k from 330k to 350k. Layoffs and hiring are both major concerns. Higher oil prices have taken a huge toll on corporate profitability. ATA was the latest company to file for bankruptcy. Hiring is also subdued with the help wanted index of job advertisements falling from 37 to 36. According to the Conference Board, help wanted advertising declined in 8 out of the 9 regions tracked over the past three months. This may detrimental to the October non-farm payrolls report that is scheduled for release next week, if the elections fail to steal all of the limelight. Should the results of the Presidential elections be unclear after November 2nd, the dollar could still suffer as traders speculating on the results park their money in safer assets for the time being. Meanwhile the National Association of Purchasing Managers announced that the Chicago PMI report will be available to paid subscribers three minutes early beginning this Friday. For traders, this means that they should expect some interesting price action between 9:57 am NY Time and 10:00 am NY Time (13:57 GMT – 14:00 GMT) as rumors about the release will flood the markets.


To the surprise of many, UK consumer confidence actually improved during the month of October. Sentiment rose from –7 to –6. The market had expected sentiment to remain unchanged or deteriorate further. However according to the report, more consumers expect their finances to improve over the next 12 months and are more comfortable with making big-ticket purchases. The fall in the value of homes, which erodes consumer wealth, has left them unfazed thus far. Nationwide house prices fell –0.4% in the month of October, indicating that the slowdown in the UK housing market is becoming more intense. The market had expected house prices to replicate the 0.2% gain that it incurred the previous month. The slowing housing market is also expected to cause consumer credit to slow.


The Japanese yen continued to appreciate against the dollar despite mixed economic data. Industrial production was much weaker than expected, falling –0.7% during the month of September. Slowing global growth has forced chipmakers to cut back inventories. Although retail trade beat expectations, it is still in negative territory, highlighting the weakness of domestic demand. Portfolio flows were also not supportive of the yen – Japan saw a net portfolio outflow of $4.3bln in the week ending October 2nd. Japanese investors continue to aggressively accumulate foreign bonds, while foreign investors have only slowly accumulated Japanese equities. Leading into tomorrow’s BoJ semi-annual monetary policy report, Governor Fukui noted that the effectiveness of monetary policy is improving and that the country’s zero interest rate policy (ZIRP) would have to be removed eventually.


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