Wednesday January 19, 2005 - 11:10:30 GMT
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INVESTICA Ltd - www.investica.co.uk
Euro/yen positioning dominates
The dollar made a fresh challenge on 1.30 against the Euro, but failed to break through this level ahead of the US capital flows report. The dollar strengthened to near 1.30 after the data and remained firm in early Europe on Wednesday, but again was unable to push through 1.30, weakening to 1.3090 on Euro/yen corrective pressures.
The US Treasury inflows report was much stronger than expected with net inflows of US$81.0bn compared with a revised US$48.3bn in October. The underlying flows were mixed with evidence of increased outflows. Flows into US stocks, for example, increased to US$16.1bn for the month from US$12.6bn in October. These flows were offset by increased inflows with overseas buying of equities at the strongest level since May 2001. There will still be doubts whether strong inflows will be sustainable, especially if the Wall Street performance remains uninspiring.
Yield factors will remain a very important factor and the stronger than expected US capital inflows will allow a greater market focus on interest rate considerations. The comments from Fed officials were close to expectations during Tuesday. Governors Stern and Santomero stated that they expected interest rates could be increased at a measured pace and these comments were repeated by Bies in Asian trading on Wednesday. The inflation figures will be important today in helping to assess whether the Fed will have to be more aggressive over rate increases. The inflation element of the Beige Book will also be important for evidence of any increase in underlying inflation. The overall evidence at this stage suggest that the Fed will keep with 0.25% rate increases and this will make it difficult for the dollar to strengthen substantially further.
Asian currency pressures will continue to have an important impact on the Euro. Speculation over Asian currency gains will continue to make it significantly more difficult for the Euro to rally against the dollar, although the near-term focus is likely to be on profit taking on long Euro/yen positions after the Japanese warnings over the past 24 hours.
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