Monday December 6, 2004 - 22:12:41 GMT
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Forex: Consolidation Likely To Occur In Dollar This Week
DailyFX Forex Fundamentals 12-06-04
By Kathy Lien, Chief Strategist of www.dailyfx.com
· Consolidation Likely To Occur In Dollar This Week
· SNB Roth Signals That Dollar Weakness Could Delay Future Rate Hikes
· Canada Rate Decision Up In The Air
Consolidation should be the theme in the euro this week with the lack of significant economic data from the US until Friday. With short term volatility significantly higher than longer term volatility, conditions are in place for volatility to return to normal levels and gyrations in price action to be less pronounced this week. Although the euro appears to be very extended, the bullish tone remains. With an unnamed Treasury Official indicating that the US has no intentions of intervening in the dollar until it falls to 1.45 against the euro, traders will continue to look for opportunities to buy on dips. The lack of significant news in US trading allowed the dollar to benefit from the concerned comments of EU finance ministers following the EcoFin meeting in Brussels. They collectively indicated that “excessive” moves in exchange rates are not welcome. Contrary to the ECB’s statement at the press conference following their monetary policy meeting last week, Belgium finance minister Reynders said that a rate cut would be more appropriate than a rate hike. However the decisions on monetary policy and intervention still lies in the hands of the ECB, and furthermore, the EU finance ministers have done nothing more than reiterate previous concerns. Eurozone government officials still believe that intervention without the US would be useless, therefore these critical comments about the euro’s rapid ascent holds as much validity as the US’ ”strong dollar” policy.
The US dollar will probably find an opportunity to recuperate some of its recent losses with a quiet economic calendar this week. One of the biggest news for the markets today is speculation that US Treasury Secretary Snow could possibly be replaced by White House Chief of Staff Andrew Card (according to NY Times). The announcement has not been confirmed and should have a nominal impact on the currency markets. In the meantime, we once again draw our readers attention to the increased risk of treasury dumping by foreign central banks. So far we know that Russia will be readjusting their dollar denominated reserve holdings. Although China has denied rumors of possibly selling of US Treasuries, the widespread speculation that they will eventually peg the Yuan to a weighted basket of currencies suggests that an adjustment of reserves could happen eventually. The latest in Treasury dumping news was an article published in the UK’s Observer newspaper. According to the article, an unnamed Japanese official said that if the dollar continues to fall, it would negatively impact capital inflow to the US. Although Japan later denied any plans to dump treasuries, these recent rumors do not go completely unsubstantiated given the erosion effect the weaker dollar must be having on the central bank portfolios. South Africa and India are also suspected to consider dumping US treasuries. Meanwhile, SNB President Roth continues to signal that dollar weakness could delay further interest rate hikes by the Swiss National Bank.
A mixed bag of data in the UK has given the pound reason to pause its spectacular rally. Industrial production fell –0.1% in the month of October, which is the fifth month of contracting growth. Growth in the manufacturing sector in general has been pretty lackluster for some time now. However, the NIESR did report a higher GDP estimate for the month of November as compared to October. Yet, the movement in the GBPUSD will continue to be dictated by the US dollar. Therefore more consolidation is most likely in store for the pound over the next 24 hours.
There has been respite for dollar yen today with the retracement in oil prices helping the pair reverse all of Friday’s losses. The move below 102 over the past 24 hours has injected sharp fears about intervention, especially as warnings came from Japan’s Business Lobby Head that further weakness in USDJPY could hurt the profits of exporters. The market is speculating that the MoF is eyeing the 102 level relatively closely, though the true threshold of pain is probably closer to the 100-level.
Expectations for a rate hike by the Bank of Canada has shifted dramatically over the past week. The market now expects the BoC to keep rates unchanged at 2.50%, compared to their original forecast for a quarter point hike. The shift in forecast follows Governor Dodge’s warning that the strength in the Canadian dollar could take a significant toll on growth. Throughout last week, we saw justification for his concern. GDP growth fell short of expectations in the third quarter, with a downward revision in Q2 as well. Labor market data also disappointed as the net positive change in employment increased less than expected, with the unemployment rate increasing. Data today though makes the forecast even murkier with the IVEY Purchasing Managers index improving and building permits rebounding.
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