Monday November 1, 2004 - 21:49:20 GMT
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Forex: Cautious Dollar Trading Ahead Of Election Day
DailyFX Forex Fundamentals 11-01-04
By Kathy Lien, Chief Strategist of www.dailyfx.com
· Cautious Dollar Trading Ahead Of Election Day
· Weaker US and Eurozone Manufacturing Sector Data
· Disappointments In Japanese Data Boosts Dollar-Yen
The market has fully turned its attention to the US Presidential Elections with less than 36 hours until the announcement of the final results. With a lot of position squaring, speculation and no clear leader at this point, we see two possible knee-jerk reactions in the currency markets on Tuesday night / Wednesday morning. Regardless of who wins, an uncontested victory by any one party will most likely result in a relief rally for the US dollar. A risk premium has been attached to dollar denominated assets over the past few weeks, as the possibility of a drawn out debate and legal battle following the elections becomes more of a reality. If there is no clear winner, then we could see a continuation of the dollar sell-off as uncertainty persists for a longer period of time. Given that results will be announced during the generally thinner Tokyo trading session, expect a pronounced amount of volatility as the results come in. The last swing state (Oregon) will be closing polls at 11pm EST, however the last battleground state (Iowa) will be closing polls at 10:00pm EST. Although, we still remain convinced that the dollar will continue to weaken against the euro because of the persistent deficit concerns, a knee-jerk dollar rally seems more likely over the short term. Meanwhile the manufacturing sector in Europe continued to weaken. The pace of expansion slowed in Germany, France and Italy with new orders, employment and output declining, confirming that rising oil prices have continued to take a toll on the entire sector.
Weaker US data left the dollar unfazed as the market held its breath ahead of Election Day. However, the significance of today’s data should not be overlooked. Personal consumption outpaced personal income during the month of September, which barring some volatility in the data remains the broad trend since the beginning of the year. The PCE report came in right in line with expectations, while construction spending and the ISM manufacturing survey proved to be disappointments. Construction spending was flat in the month of September while the ISM survey dipped from 58.5 to 56.5. Most alarming to us though was the pullback in the employment component, which fell from 58.1 to 54.8. There were deeper retracements in the employment component of the Philly Fed and Empire State manufacturing surveys. The optimistic +175k non-farm payrolls consensus estimate is based upon an adjustment of hurricane related disruptions that we saw in the month of September. According to state employment reports, hurricane disruptions are expected to have drained 40k-60k jobs last month. We still believe that estimates remain overly optimistic, leaving the market disappointed once again.
Despite stronger than expected manufacturing sector data, the British pound sold off in lockstep with the euro. The CIPS purchasing managers index increased from 52.2 to 53.0, breaking its downward streak. Solid gains were seen in the new orders, employment and prices components. This however, does not change our forecast for the Bank of England to keep rates unchanged next Thursday. The housing market has slowed considerably, industrial production contracted during the month of August, while inflation has fallen. Although retail sales remains healthy and the labor market remains tight, the effects of the central bank’s 125bp rate hikes since last November is still working its way through the economy. With GDP growth slowing from 0.9% to 0.4% qoq in the third quarter, there is not a strong reason for the BoE to be proactive at this point.
Weaker Japanese economic data has helped the dollar recoup some of its losses against the Japanese yen. Labor cash earnings on an annualized basis and bonuses fell during the month of September while vehicle sales decreased –7.0% in October. Today is another clear example of the decoupling of oil prices and the Japanese yen. Crude prices fell over a $1.50 today, as the yen gave back some of its recent gains. Meanwhile according to the Nihon Keizai Shimbun, Japanese think tanks predict growth to increase by an annualized rate of 2% between July and September. This is an acceleration from the 1.3% growth between April and June. Improving business sentiment, labor market conditions, and production are supporting evidence for their predictions.
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