Friday November 5, 2004 - 21:02:47 GMT
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Forex: Euro Soars To New All-Time Highs Against Dollar On Schroeder Comments
DailyFX Forex Fundamentals 11-05-04
By Kathy Lien, Chief Strategist of www.dailyfx.com
· Euro Soars To New All-Time Highs Against Dollar On Schroeder Comments
· Payrolls Report Indicate that US Corporations Added 337k Jobs In October
· Manufacturing Activity Contracts In Both Germany And UK
The Euro soared to new all-time highs against the US dollar (1.2954) as dual forces pushed the single currency higher. The initial rally was induced by short covering following the much stronger than expected US non-farm payrolls report. The extension of the rally came on the back of comments from German Chancellor Schroeder. This morning, Schroeder said that the euro’s rise is “not yet dramatic.” However interestingly enough, Schroeder was complaining about the euro’s rally back in February when the currency pair was also trading around these same levels. The main difference between then and now is that annualized inflation in February was 0.9% in Germany, whereas inflation is now 2.1%, which is above the ECB’s 2% target. Therefore Schroeder is most likely more comfortable with the euro’s rally today because the soaring euro helps to curb inflation. These are probably also the same reasons why we have yet to hear a peep from ECB President Trichet. At this point, a test of the psychological high of 1.30 appears to be imminent. The current account deficit has stolen the limelight from non-farm payrolls, which is a first in a long time. With the US Presidential elections only a recent memory, the markets is still concerned about the government’s initiatives to narrow the deficit. The administration has yet to reaffirm the government’s strong dollar policy, even though a confirmation on their behalf would hold limited weight in the markets. Meanwhile this morning the Eurozone reporter weaker retail trade, while Germany reported a significant contraction in industrial production.
US corporations added 337k jobs in October, which was higher than the most optimistic economist’s estimates. September payrolls were also revised upwards by 35k, bringing the annual job growth to 1.98 million. The details of the report confirm what the non-manufacturing ISM survey suggested earlier last week, which is that the service sector faced healthy job growth. The manufacturing sector on the other hand, shed jobs for the second consecutive month. As expected, hurricane adjustments were a big factor in October. Although the unemployment rate increased from 5.4% to 5.5%, it is a reflection of more people reentering the workforce rather than deteriorating labor market conditions. Price action in the EURUSD was particularly interesting, however it makes perfect sense according to FXCM's newly launched Speculative Sentiment Index. As of our release yesterday, EURUSD net shorts outpaced longs by 2.73 to 1. Short positioning increased 32% over the past week. The index indicates that speculators were extremely short. Given the short attention span of speculators and bears enduring significant losses throughout the rally this past week, the bounce in the EURUSD after the 100-pip drop is clearly a reflection of short covering. The latest NFP report solidifies expectations for a rate hike by the Fed next week, which will be the center of the market’s attention. At this point November Fed Fund futures are pricing in an implied yield of 1.93%, suggesting that not everyone believes that the Fed will be raising rates on Tuesday.
The British pound rallied on broad dollar weakness despite a much weaker than expected industrial production report. This is the fourth consecutive month of contraction in the manufacturing sector and the weakest performance after Italy in the G7. This data supports the Bank of England’s decision yesterday to keep interest rates unchanged at 4.75%. Not only is the housing market slowing, but the manufacturing sector is slowing as well. The biggest event on the UK agenda next week is the central bank’s quarterly inflation report. The report is expected to give the market a clearer indication of the central bank’s outlook for the economy in the months ahead. Aside from that, we are expecting producer prices, house prices, the trade balance and leading indicators.
The dollar continues to sell off against the Japanese yen. Interestingly enough, the dollar could only muster a lackluster 50-pip knee-jerk rally against the yen following the exceptionally strong non-farm payrolls release. This demonstrates the significance of bearish sentiment in USDJPY right now. Weaker Japanese data failed to curb gains in the yen. Household spending fell –1.0% yoy in September while overall household spending fell –1.9% mom. This is particularly concerning ahead of next week’s Q3 GDP report. Japan also saw net portfolio outflows for the week of $5.5 billion. Japanese appetite for foreign bonds continues to grow, while foreign purchases of yen denominated assets remain subdued. We continue to warn about the risk of intervention by the Ministry of Finance. The 105 level has always been a pivotal point that the market is watching and former area of intervention by the Japanese government.
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