Thursday December 16, 2004 - 22:01:00 GMT
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Forex: Dollar Soars On Improved Jobless Claims and Stronger Philly Fed
DailyFX Fundamentals 12-16-04
By Kathy Lien, Chief Strategist of www.dailyfx.com
· Dollar Soars On Improved Jobless Claims and Stronger Philly Fed
· US Current Account Deficit Widens To New Record
· Strong UK Retail Sales Fails to Keep Pound Afloat
There were surprises all around today with much stronger than expected US economic data preventing the dollar from sliding back towards its all time low against the euro. In contrast to earlier reports of insufficient funding for the widening US deficit, at first glance, the latest third quarter current account balance report suggests otherwise. According to data released this morning, the current account deficit widened only marginally from a downwardly revised $164.4 billion to a record $164.7 billion. The market was actually expecting the deficit to widen to $170.6 billion. However, abnormally large payments by foreign insurance companies for hurricane related damages decreased the net outflows of unilateral transfer payments. This means that if it weren’t for the natural disasters, we would surely have seen a larger deterioration in the current account. As a result, another record high will probably be seen in the fourth quarter. Therefore the US economy is not off the hook despite a somewhat more encouraging current account report. With the EURUSD trapped between 1.32 and 1.34, range players were just looking for reasons to sell the euro near its highs. These same players may be looking for opportunities to bid the pair higher at the bottom of the range. Meanwhile in euro news, a dip in oil prices brought inflation lower by –0.1%, but the annualized rate remained unchanged at 2.2%. The French current account balance on the other hand widened by a much worse than expected -EUR1204 million from –EUR158 million in the previous month.
The dollar not only benefited from the better than expected current account deficit, but also from an improved jobless claims report and a stronger Philly Fed survey. Jobless claims dropped by the most since July while the Philly Fed Survey recorded the highest reading in five months. However the employment indicators from both reports are somewhat contradicting. The jobless claims report suggests that employers seem to be retaining more employees to meet solid demand. The employment component of the Philly Fed survey on the hand fell to 14.7 from 17.4, with an equally disappointing deterioration in the six-month outlook. This indicates that growth in the labor market remains moderate. The surge in activity in the Philadelphia region came primarily from increased orders and shipments. The latest housing market data suggests that the sector may be on its way to experiencing slower growth. Housing starts experienced its biggest drop since 1994. With the Federal Reserve sending interest rates on a one-way path upwards, it is inevitable that we would see the sector begin to cool.
Furthering gains on yesterday’s optimistic average earnings report, investors bid the British pound higher on better than expected retail sales numbers. Retailers saw an increase in sales of 0.6 percent as deep discounts were issued to attract shoppers during the month of November. As a result, the U.K. currency soared to as high as $1.9550, a level the currency pair has not traded above in 12 years. Ultimately, the release added to yesterday’s speculation that the Bank of England may consider the idea of increasing interest rates further as potential inflationary pressures looms on stronger U.K. fundamental growth. However, this remains questionable, as policy makers have already raised rates five times since November 2003 and there is further evidence of a cooling housing market. In November, according to the latest housing price index report, prices dipped slightly by 0.4 percent.
With economic data nonexistent during the session, dollar fundamentals dominated once again as investors eyed the better than expected U.S. economic data and pared back yen long positions. Additionally, rising oil prices failed to alleviate subsequent downside pressure as crude oil contracts traded higher at $44.29 a barrel for January delivery. Coupled with yesterday’s disappointing business sentiment survey and leading economic index, rising oil prices may create an increasingly difficult situation for the world’s second largest economy as manufacturers suffer from higher raw material costs. Ultimately, market participants will be anticipating the results of the Bank of Japan policy meeting with further attention on next week’s economic calendar for additional confirmation of a momentary economic slowdown.
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