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Thursday December 2, 2004 - 21:29:38 GMT -

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Forex: Dollar Rallies Ahead Of Payrolls

DailyFX Fundamentals 12-02-04

· Dollar Rallies Ahead Of Payrolls
· ECB Surprises Market By Contemplating Rate Hike
· UK Construction Sector Activity Stronger Than Expected


The euro gave back some of its recent gains against the US dollar as the ECB left interest rates unchanged. The ECB lowered its growth forecasts by 0.4% to 1.4%-2.4% for 2005. However, their inflation forecasts was revised higher, which to the market’s surprise prompted the ECB to consider raising interest rates at today’s monetary policy meeting. ECB President Trichet said that the inflation outlook is “worrisome,” which may explain the central bank’s reluctance to intervene in the currency markets. The rise in the euro helps to reduce inflationary pressures and if inflation is so concerning that the ECB considered hiking rates, it is highly unlikely that they would intervene in the near future. Stronger US factory orders and a 15% decline in oil prices over the past 3 days has triggered a nice rally in the dollar today. According to the FXCM Speculative Sentiment Index (SSI), a more constructive decline may be in store for the euro. Over the past week, the ratio of longs to shorts flipped from net short to net long. Shorts were cut in half while longs doubled, with little change in open interest. This suggests that the fresh all time highs have spoofed euro shorts into a stop and reverse strategy. Taking the SSI as a contrarian indicator, we conclude that this data provides an exacting example of what occurs prior to a large trend's retracement.


The US dollar rebounded against the majors ahead of Friday’s non-farm payrolls report. Stronger than expected factory orders and shipments helped to offset some of the negative tone following the disappointing jobless claims report. There is increasing evidence that the manufacturing sector is rebounding as demand accelerates. Hawkish comments from Fed President Bernanke also added fuel to the dollar’s rally. Helping to spur speculation for a strong non-farm payrolls report tomorrow was the new all-time high reached in the Monster Employment index. The online recruitment giant is seeing strong increases in job postings, especially in health-care, finance and military sectors. The market is currently forecasting a 200k increase in payrolls in the month of November, which follows the 337k increase the prior month. The recent trend in jobless claims also encourages optimisim ahead of the payrolls report. The employment component of the Chicago PMI and ISM reports also point to a healthy release. The only caveat is that the October data benefited significantly from hurricane related adjustments. The November data, on the other hand will not.


Retracing from 12-year highs, investors pared back gains in preparation for positioning ahead of the U.S. employment report. Overnight, confirming previous releases, economists saw the CIPS construction industry survey increase to 56.7 unexpectedly in November. Most were anticipating a reading of 52 as all components climbed in the release. This serves as confirmation that the economy does not appear to be as hampered as the market initially thought by the five interest rate hikes since last November and looks to be expanding in line with earlier growth forecasts of 3 to 3.5 percent for the year. However, inflation seems to be somewhat tamed at the moment as housing prices advances have slowed as of late and prices at the consumer level remain steady. The recent slew of improving economic data may be providing justification to the recent sterling run up.


Broad strength in the dollar has helped USDJPY move higher today. There has recently been a lot of speculation about coordinated intervention by the BoJ and ECB. The Financial Times even reported that the two had discussed the possibility of joint intervention. Japanese Finance Minister Tanigaki was on the wires this morning saying that even if Japan and Europe contacted each other, it does not mean that they are “about to do something together.” Based upon comments following the ECB’s press conference this morning about rising inflationary pressures, it is unlikely that they would agree to intervene anyway. As for Japan, an article in the Nihon Keizai Shimbun may be a good summary of why the central bank is so patient with intervention at this point. Unlike last year, exporters are more resilient to changes in the yen. According to a Cabinet Office Survey, exporters have improved their profitability by slashing personnel and distribution expenses as well as raising product prices.


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