Friday October 29, 2004 - 10:08:49 GMT
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FOREX: US OPEN MARKET POINTS 10-29-04
Swissie KOFs it Up.
Yesterday’s first rate hike in 9 years by People’s Bank of China caught the market off guard yanking USD/JPY up by 100 points in a matter of minutes and then just as quickly sending the pair back down as traders tried to handicap the long term implications of the move. Presently Chinese authorities peg the yuan at approximately 8.300/USD effectively putting the whole country on a de facto dollar standard. As the Federal Reserve changed it monetary policy from an accommodative to more restrictive stance, raising the Fed funds rate three times in the last three months, Chinese policy makers had no choice but to raise their own rates in response. Not only was the move economically necessary, but its was politically astute. By focusing the market’s attention on the rate hike PBC defused talk of yaun revaluation for the time being. As we’ve stated earlier, China is unlikely to relax currency controls in the near future. Faced with the massive task of gainfully employing a population of 1 Billion workers, China’s policy makers will not effect a plan that could seriously impede the country’s growth. China is still in the process of converting from a rural to an urban society and until that transformation is finished, its exchange rates will remain low.
Meanwhile USD/JPY refuses to rally from the 106 handle and is even making forays into the 105 level. The price action must be maddening to USD bulls because fundamental data from Japan continues to disappoint. Tonight’s releases brought news that the country lost 70,000 jobs in September while the workforce declined by 240,000. The unemployment rate actually declined from 4.8% to 4.6%, but only because more workers left the labor force. Furthermore, Tokyo core CPI index contracted by –0.3% versus –0.1% decline last month indicating that deflation stubbornly persists. At present, USD/JPY is trading only off dollar bearish news and if today’s US GDP prints better than expected 4.3% rate of growth complacent yen bulls may be in for short squeeze. However, should the number disappoint the pair could probe the lower 105 level as momentum players will continue to press the trade.
Turning to Europe the major story of the night is the shockingly disappointing KOF survey of Swiss Leading Economic Indicators which reported .79 versus .95 expectation. Adding salt to the wound was the downward revision of last month’s number from .97 to .84. The KOF numbers are not positive for the Swiss economy implying a downward revision Q1 GDP projections. The market has been expecting further monetary tightening from SNB with a possible rate hike in December. Given tonight’s poor data it’s far more likely that SNB will abstain. After tonight’s news, the Swissie, which has been in uninterrupted uptrend against the euro over the past month looks ready to retrace some of those gains.
FX Spot Overnight
- EUR consolidates at 2750 as most data prints within expectation
- JPY data sour but yen keeps probing 106 handle
- GBP holds 8300 as lending slows to 17 month low
- CHF KOF data surprises to the downside as unit recovers the 2000 handle
12:30GMT – (8:30 AM EST) USD GDP Annualized (3Q A) Expected 4.3%, Previous 3.3%
12:30GMT – (8:30 AM EST) USD Personal Consumption (3Q A) Expected 4.7%, Previous 1.6%
12:30GMT – (8:30 AM EST) USD GDP Price Deflator (3Q A) Expected 1.6%, Previous 3.2%
12:30GMT – (8:30 AM EST) USD Employment Cost Index (3Q) Expected 1.0%, Previous 0.9%
12:30GMT – (8:30 AM EST) CAD Gross Domestic Product m/m (AUG) Expected 0.3%, Previous 0.1%
13:45GMT – (9:45 AM EST) U. of Michigan Confidence (OCT F) Expected 88.0, Previous 87.5
14:00GMT – (10:00 AM EST) Chicago Purchasing Manager (OCT) Expected 59, Previous 61.3
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