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Monday November 15, 2004 - 22:56:45 GMT -

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Forex: Battle Of The Central Bankers Keeps Euro Trapped

DailyFX Forex Fundamentals 11-15-04

By Kathy Lien, Chief Strategist of

· Battle Of The Central Bankers Keeps Euro Trapped
· US Not Likely To Be Interested In Forex Intervention According To EU Alumnia
· Empire State Manufacturing Survey Weakens


The euro begins the week trapped between 1.2850 and 1.3000. Range trading remains the predominant today with FXCM’s proprietary Speculative Sentiment Index (SSI) showing a pretty significant shift in positioning this morning. At 5am EST, speculators were very net short euros. By 1pm EST, speculators decreased short positions by 15% while increasing long positions by 56%. (The public version of the SSI is available every Thursday at 10:30 EST) With no clear market direction at this point and a predominately buy on dips mentality in the EURUSD, speculators have resorted to range trading, with bears taking quick profits. The latest round of verbal intervention by Belgium’s Reynders, Austria’s Grasser and ECB’s Gonzalez-Paramo has only had a nominal affect on the euro. Over the next 24 hours, there are 2 events that the market will be focusing on that could potentially determine the fate of the euro near term. The first is a meeting this evening of EU finance ministers. Physical intervention is suspected to be on the agenda. However, judging from the comments made today and some of the observations that we have made over last week, it is unlikely that the ECB will elect physical intervention as a policy option. EU Alumnia said last week that only a coordinated intervention with the US would make intervention effective, however he added today that it is unlikely that the US would be interested in forex intervention. In addition, high inflation and lower 1-month implied volatility also give valid reasons for the ECB to refrain from intervening at this time.


This week the currency markets are dominated by comments from central bank officials. With the FOMC blackout period over, many Fed officials are scheduled to speak on interesting topics that include the outlook for the US economy. Of most particular interest though will be the speeches later this week by Fed Chairman Alan Greenspan. He will be speaking on both Thursday and Friday, with Friday being a panel discussion with ECB President Trichet and BoJ Deputy Governor Iwata about ‘The Euro in Wider Circles.’ A question and answer session will follow both discussions. We expect the Chairman to be asked questions about how the US government and Fed officials feel about the dollar’s current value against the euro. If he suggests that the dollar’s decline thus far is not a major problem, we could see further upside in the EURUSD pair. Right now it is really a battle of the central bankers. European officials are talking down the euro while Fed officials are synthetically talking up the euro through their weak dollar comments. This is exactly the reason why we will be specifically looking for Fed officials to repeat their warnings about the need for a dollar correction to stop the current account deficit from widening. More immediately addressing this issue though will be tomorrow’s Treasury International Capital flow data. If you recall, in August, inflows were barely enough to cover the trade deficit. For the month of September, flows are expected to be a bit more positive, which could be bullish for the dollar. Meanwhile today’s Empire State Manufacturing survey increased less than expected during the month of November. Shipments increased this month while new orders and hiring slowed. The EURUSD barely moved following this release as the Empire State manufacturing survey has thus far had a weak correlation with the national ISM survey.


There was more broad range trading for the British pound today as we look ahead to tomorrow’s heavy data calendar. The RICS House Price Balance for the month of October is expected to continue to confirm falling house prices. Inflation reports on the other hand are expected to continue to report upward inflationary pressures especially with oil prices averaging $53 a barrel throughout the month of October. The main point to focus on however is that economic data overall has been reflective of weaker growth. Yield spreads between the UK and the US are narrowing, as the Bank of England stands pat while the Federal Reserve continues on their tightening cycle. Once the pound stops piggybacking the Euro, we should see this relationship begin to dictate the currency’s price action.


The dollar continues to sell off against the Japanese yen. With such weak GDP growth in the third quarter, there is an increasing need for the Bank of Japan to intervene at this point. Tokyo department store sales declined for the eighth consecutive month. Although bankruptcies and condominium sales increased during the month of October, the outlook for the Japanese economy remains dismal. The Japanese government is expected to downgrade the outlook for the Japanese economy for the first time since July 2003. The leading economic index for Japan is expected to decline for the second consecutive month, extending the sharp fall in September.


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