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Wednesday December 8, 2004 - 21:46:59 GMT
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Forex: Buy On Dip Mentality Saves Euro From Deeper Slide

DailyFX Fundamentals 12-08-04

By Kathy Lien, Chief Strategist of www.dailyfx.com

· Buy On Dip Mentality Saves Euro From Deeper Slide
· Swiss Unemployment Hits 7 Month High
· Dollar Yen Rallies On Weak Growth

EURUSD

The lack of any pertinent US or European economic data today has made the 1.35 barrier rock solid resistance ahead of Friday’s US PPI report. This has given the dollar a good opportunity to recover some of its recently spectacular losses. However, as we eluded to earlier in the week, euro bulls will view any retracement as an opportunity to buy on dips. Today’s rally back from the 1.3192 low hit in early US trading was a clear example of such mentality. Overall, consolidation near the highs should continue to be a predominant theme. In fact, even though US PPI and the University of Michigan Confidence survey on Friday are the only significant economic releases expected this week, they will most likely not have the strength to push the EURUSD above 1.35. Instead, we will really need to look past this Friday to the following week, where we are laden with a tremendous amount of key economic releases including US retail sales, the trade and current account balances, industrial production, the Treasury International Capital flow data, CPI and the FOMC rate decision. With the deficits being the primariy catalyst for dollar weakness, next week will be a pivotal for the dollar. In the meantime, pullbacks in the euro should remain relatively shallow.

USDCHF

The dollar has also found some respite this week from the retracement in oil prices. Since hitting a high of $55.67 bpd on October 27th, oil prices have fallen 22%. Warmer weather in the Northeast has helped to reduce demand and increase stockpiles. This suggests that heating oil bills will not be as high as initially anticipated, which could help boost consumer spending. However, one uncertainty for the outlook for oil prices is the OPEC announcement on December 10. Some believe that OPEC oil producers may push for a cut in production as prices slide. If they do so, oil prices could resume its rally. Tomorrow’s release of US import and export prices will get a bit of attention as it will give an indication of current inflation conditions. In other news, the US Administration announced that John Snow will remain as Treasury Secretary, refuting two prior articles written in the Washington Post and the New York Times suggesting that he will be replaced. Meanwhile, the Swiss unemployment rate increased to 3.9% from 3.7%. The number of unemployed individuals reached the highest level in 7 months, supporting the Swiss National Bank’s suggestion that “normalization” of monetary policy may be delayed for some countries.

GBPUSD

Like the euro, bulls looked for opportunities to buy on a dip today in the British pound. Once again, pound news was essentially non-existent. The dollar continues to lead demand for the pair despite the divergence between Eurozone and British growth prospects. A clearer picture of fundamentals is seen in EURGBP, which broke down in the beginning of this month. This is the third consecutive day of losses in EURGBP with further weakness likely as growth in the Eurozone becomes more concerningly weak than growth in the UK.

USDJPY

The dollar broke out of its recent consolidation against the Japanese yen on the back of exceptionally weak GDP growth. The latest piece of economic data in a string of disappointing reports suggests that Japan may indeed be faced with the risk of entering a recession. With a 0.1% increase in activity in the third quarter, growth is just shy of stalling, as falling wages and increased unemployment hurt consumer spending. With slower global demand dampening exports, Japan was really relying on domestic consumption to spur growth. Furthermore, the sentiment of worker’s whose jobs are closely tied to the performance of the economy were less optimistic about business conditions in November than they were in October. Both the current and outlook components of the Eco Watcher’s survey deteriorated and remained below the 50 expansionary or contractionary level. The deterioration in exports is expected to be reflected in Japan’s current account balance for the month of October, which is forecasted to decline from Y1774.3B to Y1385.2B in unadjusted terms, which would be a slight seasonally-adjusted decrease of ¥14.3B. In addition to record high oil prices for the month, China’s government-imposed economic deceleration is also having its impact on Japanese trade. The first Chinese interest rate hike of nine years is expected to help bring the bubble economy in for a soft landing. The implication for Japan is that export demand from its second-largest overseas market will be reeled in as well.

 

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