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Friday December 3, 2004 - 22:27:04 GMT -

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Forex: German Paper Reports US Not Expected To Intervene In Euro Until It Breaches 1.45 Against Dollar

DailyFX Fundamentals 12-03-04

By Kathy Lien, Chief Strategist of

· German Paper Reports US Not Expected To Intervene In Euro Until It Breaches 1.45 Against Dollar
· Dollar Weakens On Disappointing US Non-Farm Payrolls
· Strong Service Sector Data Fuels Gains in Pound

The euro has strengthened to another new all-time high against the dollar. The relatively quiet US economic calendar next week suggests that the tone has been set for the weak ahead. The rally in the euro today has been gradual. Speculative positioning in the EURUSD (as measured by the FXCM Speculative Sentiment Index) is extremely interesting at this point. Prior to the non-farm payrolls release, speculators were net long EURUSD. The latest release (at 13:00 EST, 18:00 GMT) indicates that once again, longs have flipped positions with 1.77 short positions for every long position. Although the index can be fairly volatile, if short positions continue to dominate, a break above 1.35 would be a near certainty with short covering being inevitable. Euro bulls also found comfort in an article released by German newspaper Boersen-Zeitung, which cites a “high-ranking” US Treasury official as saying that they would not consider supporting the dollar until the EURUSD breaches 1.45. Meanwhile the weakness that we saw in the manufacturing sector earlier this week is also reflected in the service sector. Activity deteriorated to a 15 month low in the Eurozone, with weaker conditions seen in Italy, France and Germany.

A disappointing US non-farm payrolls release has helped the dollar reach new record lows against the euro. According to the NFP report, US companies added fewer than expected 112k jobs in the month of November, down from the downwardly revised 303k jobs added in October. The market had actually forecasted 200k jobs to be added to the economy last month. The release was weaker than even the lowest forecast by economists, and especially surprising given last month's strong number. This reminds us of this past summer, when every economist on the street consistently high-balled the NFP estimates. As a benchmark, it is estimated that 150k new jobs are needed to be created each month just to absorb the new workers joining the labor force. This is the weakest pace of job growth in 4 months. The manufacturing sector lost jobs for the third consecutive month. Average hourly earnings increased a less than expected 0.1% while average weekly hours worked fell from 33.8 to 33.7. The unemployment rate dipped to 5.4% from 5.5%. With most employment indicators released ahead of the report suggesting strong job growth, the only clue was in the Consumer Confidence report released earlier this week, which showed that an increasing number of consumers found jobs difficult to get in November. The decidedly weaker number should pare back some expectations for a Fed rate hike on December 14th. Also, the clear difficulty in finding jobs could dampen holiday spending. Walmart has already reported weak spending with other holiday shopping data generally mixed.

Over this past week, the British pound has been the best performing currency against the dollar. A week of stronger economic data and bearish sentiment in the dollar has fueled significant gains for the GBPUSD. Improving activity in the service sector helped to fuel optimism, which follows the stronger manufacturing sector report that was released earlier this week. House prices though were not as supportive, having fallen –0.4% m/m as measured by Halifax. This comes in sharp contrast to the Nationwide House Price report released earlier last week. Nevertheless, with cable at 12 year highs, it should be an easy ride to 1.95. As for 2.00, if bullish momentum remains, a test of that level would not be surprising. However, short term volatility (1week) has increased significantly over the past few days, which suggests that we may be in store for a brief period of consolidation. Whether this is the case or not still remains unclear since there is a very heavy UK economic calendar next week.

Consolidation seems to be the theme in USD/JPY this week as no real direction has been established in part due to increased rhetoric issued by policy makers and speculative rumors of coordinated intervention efforts. After defending recent contacts with European officials yesterday, Japanese Finance Minister Tanigaki made additional comments today warning that the central bank “will take bold action if needed” given current market valuations. Almost a daily occurrence now, these statements seem rather weak, as intervention has not occurred since March of 2004. Furthermore, exporters’ increased resiliency towards currency fluctuations this year and optimistic economic growth prospects in Japan have led many investors to favor dollar shorts but remain cautious of ominous central bank action. Adding to the economic expansion potential of the world’s second largest economy was an upbeat survey released this morning that showed capital investment soared 14.4 percent higher in the July-September period. The better than expected gain may prompt economists in raising productivity estimates for the quarter, furthering the notion of dollar bearish sentiment.


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