Thursday December 9, 2004 - 21:33:44 GMT
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Forex: More Range Trading in Euro As Speculators Pare Positions
DailyFX Forex Fundamentals 12-09-04
By Kathy Lien, Chief Strategist of www.dailyfx.com
· More Range Trading in Euro As Speculators Pare Positions
· Dollar Shakes Off Disappointing Jobless Claims
· Dollar Yen Extends Rally On Disappointing Data
Consolidation and range trading continues to remain the predominant theme for the euro. Retracements remain shallow with strong demand keeping the pair bid between 1.3200 and 1.3460. Although Italian Prime Minister Berlusconi blamed the ECB for the rise in the euro, the market continued to shake off persistant verbal intervention and complaints from European corporations such as Fiat. The lack of concern by the market stems partially from the second consecutive monthly rise in German exports, indicating that foreign consumers continue to buy German goods despite the rise in the euro and higher oil prices during the month of October, which is slightly comforting. German industrial production also increased for the second consecutive month, mimicking the back-to-back gains in factory orders. Although we are expecting a heavy economic calendar tomorrow, indecision in the market and a relatively lower significance of tomorrow’s data set will make it difficult for the EURUSD to breach 1.35. This week’s FXCM Speculative Sentiment index (www.dailyfx.com/ssi.html) indicates that net long positioning in the euro fell from 1.68 to 1.12. Last week, when positioning flipped from net shorts to net longs “We conclude this data provides an exacting example of what occurs prior to a large trend’s retracement,” the recent pullback in the EURUSD confirms the accuracy of the SSI. The near parity of the ratio and the fall in open interest suggests that another period of consolidation below the all-time high is likely, as traders square positions at current levels and indecision dominates price action.
There was quiet trading in the US dollar today as the only notable currency that it was able to rise against was the Japanese yen. The dollar barely budged on a higher than expected jobless claims report. The increase in claims was the largest since the week of Sept 24th. There could have been some Thanksgiving holiday related distortions, but given the recent disappointment in payrolls and announced layoffs at Colgate, slower labor market growth should not catch many by surprise. Meanwhile, the import price index increased by a more than expected 0.2%. The fall in the dollar makes imported goods more expensive, which the government hopes will increase demand for US made goods. Tomorrow, we are expecting the producer price index and the University of Michigan consumer confidence survey. The growth in producer prices is expected to pare back significantly given the sharp rise in October. PPI holds less of significance than the consumer price index because the pass through of costs to consumers have been limited.
The British pound extended yesterday’s retracement on a wider than expected trade deficit. Imports hit their highest level on record as consumption of EU goods increased. Falling demand for UK made goods also contributed to the -GBP860M increase in the deficit. The negative oil balance from the previous month did flip back into positive territory as production increased after maintenance work in the North Sea ended. The Bank of England also left rates unchanged at 4.75%, which was widely expected given a clear slowdown in the housing market, weaker retail sales, industrial production and manufacturing sector data.
The US dollar extended its rally against the Japanese yen as machinery orders contracted 3.1% m/m and the current surplus fell by a more than expected 9% from September, but increased 7.4% yoy. The strong yen and weaker international demand slowed exports while high oil prices boosted the value of imports. Disappointing machinery orders is further evidence that economic growth is weakening since it is frequently seen as a leading indicator of corporate capital investment. Business investment has been one of the few sectors that have been supporting growth in Japan at a time when the economy is at risk of tipping into recession. In a rare comment on currencies, Prime Minister Koizumi expressed concern about the rapid fall in the US dollar. Meanwhile according to Nihon Keizai Shimbun, the much awaited quarterly Tankan report of business sentiment expected out next week could very well report a dip for the first time in seven quarters. The strength of the Japanese yen, higher oil prices and faltering external demand would all provide just cause for a retracement in sentiment.
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