Tuesday November 2, 2004 - 21:26:42 GMT
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Forex: Dollar On Election Watch
DailyFX Forex Fundamentals 11-02-04
By Kathy Lien, Chief Strategist of www.dailyfx.com
· Dollar On Election Watch
· German Unemployment Expected To Increase By 12k
· Pound Rallies On Stronger Retail Sales
The global markets, including the US dollar is currently on election watch. We see two possible reactions in the FX markets following the election results this evening. According to the CFTC COT reports for last week, short dollar positioning has been growing for a few weeks now. This is most likely a result of traders factoring in the increased possibility of a long drawn out legal battle in the courts following tonight’s election results. Euro longs on the IMM rose to a 2-½ year high as of Oct 26, which is clear evidence that the big players in the market are very long. Therefore if there is an undisputed winner tonight, we expect an immediate relief rally in the dollar, which means a EURUSD sell off. Liquidity is exceptionally thin during Tokyo trading hours, which is when the results will be delivered. This means that we could very well see stop-hunting on the interbank market, resulting in wild swings. If there is no clear winner, then we could see a continuation of the dollar sell-off. Ultimately, a long drawn out legal battle only means one thing, which is uncertainty. Whenever there is uncertainty, especially when it is related to the US, the dollar suffers, while safe haven assets such as gold and the Swiss franc benefit. Meanwhile German retail sales fell –0.4% in September, highlighting the weakness of domestic demand. According to Reuters, the unemployment number leaked once again. German unemployment is expected to increase by 12,000 in October.
The dollar strengthened modestly as the ranges hold in both the EURUSD and USDCHF. The market’s primary focus today is without doubt on the US Presidential elections (see EURUSD commentary). However, we want to draw our readers’ attention away from the election for a second and look ahead to Friday’s non-farm payrolls report. Yesterday, we talked about how the employment components of the Philly Fed, ISM and Empire State manufacturing surveys pulled back. Today, in contrast we saw the release of the Challenger report of layoffs. According to group, layoffs in US corporations were down 5.6% mom and 40% yoy in October. This is slightly comforting even though we continue to hear about layoffs from big name companies such as AOL, who announced just today that it plans to cut 3.5% of its workforce. Meanwhile weekly Redbook retail sales fell –0.6% in the last week of October. This is the fourth consecutive week of negative retail sales, which certainly is not good news for October’s retail sales report, which is expected out next week.
The British pound retraces the prior’s day’s losses on quiet trading ahead of the US Election results. A better than expected CBI retail sales survey helped to boost sterling strength as it highlights the continually healthy appetite of UK consumers. The index surged to +11, from –9 in September. As we have previously mentioned, despite high oil prices increasing costs and falling property valuations eroding household wealth, consumers continue to spend. Part of this strength was a result of aggressive discounting in stores, but we believe that the tightness of the labor market has also helped to keep demand afloat. In contrast, the CIPS construction PMI survey declined from 56.8 to 55.0. Activity remains in expansionary territory but the latest data indicates gradual slowing in the sector. However, for the time being, pound traders are best off if they keep their eyes peeled on the developments in the US, as the dollar should be main driver of currency movements over the next 24 hours.
Yesterday’s rally was relatively short-lived in USDJPY. Although some can attribute today’s price action to a delayed reaction to the fallback in oil prices, all we can make note of is cautious trading in USDJPY ahead of the US election results. Tokyo will see the bulk of FX movements given that the results will be announced by midnight EST. The relatively thinner trading during Tokyo hours should exacerbate volatility in the markets. Most pairs including USDJPY have been in consolidating for the past few days, waiting to react off of the election results and US non-farm payrolls on Friday. Should the dollar face any negative shocks, we could easily USDJPY breach the 105 handle. If this is the case, we expect aggressive jawboning by Japanese government officials. As for physical intervention, back in late March, the Ministry of Finance stood on the sidelines as USDJPY dipped into the 103 level. This indicates that since the beginning of this fiscal year, the MoF has felt less compelled to tap into physical intervention as readily as they did throughout 2003. Whether they are still patient remains to be seen, but increased volatility and more interesting price action is definitely in store for USDJPY given the event risks over the next week (Elections, Non-Farm Payrolls, FOMC).
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