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Forex: Japanese Yen Rallies On Positive Economic Developments

DailyFX Forex Fundamentals 10-29-04

By Kathy Lien, Chief Strategist

· Mixed US Data Leaves Dollar Traders Jittery
· Higher Eurozone CPI Estimate Supports Euro
· Japanese Yen Rallies On Positive Economic Developments


The currency markets have been very active these days with a tremendous amount of important economic data released over the past few weeks, volatility in oil prices and position adjustments ahead of the US elections. This morning, the flash CPI estimate for the month of October in the Eurozone topped estimates at 2.5%. This is far above the central bank’s 2.0% target and exceeds the market’s 2.3% forecast. The surge was primarily a result of rising oil prices. The ECB expects inflation to fall below their target level next year, but this is also contingent upon the easing of oil prices. Meanwhile industrial and economic confidence in the Eurozone in general improved while the number of unemployed individuals in France decreased by 17k. All eyes next week will be on the US Presidential Elections followed by non-farm payrolls on Friday. With the outcome of the Presidential elections still unclear, there could be quite a bit of volatility on Monday and Tuesday with traders either squaring or readjusting positions ahead of the results. There is of course the risk that the election will still be undecided after November 2nd. We can only see this as dollar negative since it raises and prolongs uncertainty, causing some investors to park their money in safer assets.


Mixed US data left dollar traders jittery today. GDP increased 3.7% in the third quarter, which was actually much weaker than the market’s 4.3% forecast. Although consumer spending increased 4.6% in the third quarter, nearly triple the pace of the second quarter, growth suffered from rising oil prices and a slowdown in inventory rebuilding. Higher oil prices have caused the trade deficit to widen which has dragged down overall growth. However at 3.7%, GDP is still strong and above trend. Inflation was more subdued with the price deflator increasing a less than expected 1.3%. The Fed’s favorite inflation measure, the PCE price deflator also increased a more modest 0.7%. Meanwhile although growth was weaker than expected, the dollar did rally following a stronger final University of Michigan confidence survey and Chicago PMI report. Manufacturing activity in the Chicago region surged to a 17 year high. Although employment barely increased, healthy gains were seen in the production and new orders components. Overall, today’s data should provide minimal new information for the candidates going into Tuesday’s US Presidential election. Meanwhile the Swiss KoF leading indicator for October fell to 0.79 from 0.97 as higher oil prices hurt exports.


Unsurprisingly, net consumer credit fell once again in the month of September from 1.9B to 1.6B. Along with this week’s sharp fall in the home prices, we believe that the Bank of England will stand pat at their monetary policy meeting next week. Movements in the pound should be dictated primarily by dollar developments next week given the importance of non-farm payrolls and the US Presidential elections. Meanwhile Rebecca Riley, a researcher at the NIESR attributed a part of the weakness in inflation to the strength in the British pound.


The Japanese yen soared against the dollar on the back of encouraging economic data. In their semiannual outlook, the Bank of Japan was relatively optimistic, predicting inflation and growth to accelerate next fiscal year. They forecast inflation to increase by +0.1% in 2005. Higher Tokyo and National CPI reports helps to support the Bank of Japan’s predictions for increasing inflationary pressures. If you recall, the BoJ has publicly announced their intentions to keep interest rates on hold until inflation is in positive territory and increasing for a few months. However unsurprisingly, the headline numbers has been driven upwards by higher energy prices. On a monthly basis, household spending did increase by a more than expected 0.3% while the jobless rate unexpectedly dropped from 4.8% to 4.6%. Housing starts also remained robust rising 10.1% yoy in September. USDJPY is nearing dangerous territory at this point. The risk of intervention increases significantly as we get closer to 105. Although China’s attempts to slow growth may give the Ministry of Finance reason to delay intervention, we would be surprised if the central bank fails to at least step up their verbal intervention.


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