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Thursday December 23, 2004 - 22:35:21 GMT -

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Forex: Euro Makes New All-Time High Above 1.35 On Thin Trading

DailyFX Fundamentals 12-23-04

By Kathy Lien, Chief Strategist at

∑ Euro Makes New All-Time High Above 1.35 On Thin Trading
∑ US Housing Market Slowing On Fed Rate Hikes
∑ Stronger UK Data Does Not Give Pound Much Juice


With weaker than expected US durable goods data and a sharp fall in new home sales, euro shorts found a fundamentally sound reason to rally the pair to fresh all-time highs above 1.35 on thin holiday trading. As we mentioned yesterday, the bias to the pair is to the upside since speculators on both the IMM and FXCMís Speculative Sentiment Index are both holding net short positions. The clear range trade play that has been the theme over the past 2 weeks attracted many traders back into the markets, because for once, the trade was rather obvious. However, with the latest FXCM SSI report released this morning, net short positioning is not in extreme territory. The rise in the ratio has been a result of an increase in positioning, which is particularly interesting as trading in the overall market usually thins during the holidays. The buildup of short positioning (+52%) and near equivalent slide in long positioning (-48%) indicates that speculators continue to range trade. However, the extreme level of positioning, which includes the largest amount of shorts in a month indicates that the risk is building for a more substantial move to the upside over the next few weeks. The report coincides with the recent flip to net short positioning on the IMM, which builds an even stronger case for sustained overshooting above 1.35 in early January.


Todayís heavy economic calendar did bring about modest excitement to the markets, causing the dollar to fall to fresh lows against the euro. The surprise was mostly to the downside with a sharp deterioration in durable goods less transportation orders and new home sales. Although the headline durable goods orders report surged 1.6% in November, far surpassing expectations, stripping out orders for motor vehicles and aircrafts, orders for durable goods fell Ė0.8%. New home sales experienced the biggest decline in 10 years, falling from an upwardly revised 1.278 million to 1.125 million. With five rate hikes year to date, there are finally signs that the housing market is being affected by the Fedís 125bp of tightening. Last week, housing starts fell by the largest amount in 11 years. However, not all news was bad news today. Encouragingly, personal income increased 0.3% while personal spending increased only 0.2%, which suggests that the US may finally be reining in its extravagant spending habits. Consumer confidence also improved while jobless claims were modestly better than expected. Stock and bond markets are closed tomorrow, which means that trading should be particularly dull. In the week ahead, Chicago PMI and the Conference Board Consumer Confidence survey are the only reports that worthy to note. Neither of which though, should have the clout to shift the dollarís trend.


Falling from 12 year highs, the British pound inched lower earlier in the session on a wider than expected current account deficit. Estimated to have ballooned to 6.5 billion pounds, the shortfall widened to 8.5 billion pounds, a level not seen since the first quarter of 1999. The more comprehensive report looks to confirm an earlier trade deficit release that indicated net imports contributed to 5.3 billion pound deficit in October. Additionally released were gross domestic product figures for the third quarter. In line with earlier estimates of 3.1 percent, productivity slowed slightly in Europeís second largest economy compared with a 3.6 percent gain in the second quarter of 2004. As a result of todayís disappointing reports and in preparation for the long holiday weekend, investors pared back positions slightly as the cable remained in a relative range in light of thinning volume. Continued speculation exists, however, that further weakness may be witnessed, as recent economic reports remain unpersuasive that any additional hikes may be in store for early next year. Furthermore, short sterling contracts look to confirm expectations as traders are pricing in no rate increases till later in 2005.


The Japanese yen strengthened for the second straight session on speculation that the recent run up in domestic equities may spur further demand next year. According to a report released by the Ministry of Finance, international investors were net buyers of Japanese stocks in all but nine weeks as the currency gained 3 percent against the dollar in 2004. Contributing to the optimism were higher closes by Japanís Nikkei 225 Stock Average. The benchmark index ended the previous session at a five week high, rising 0.75 percent to 11,209.44. As a result, investors are eyeing any further advances towards the psychological 12,000 mark. Ultimately, higher Japanese stock valuations will add to yen bullish sentiment, which can already be confirmed as net long positions currently stand at 33,636 contracts.


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