Wednesday January 19, 2005 - 21:56:30 GMT
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Euro Breaks Below 1.30 On Positive US Economic Data
DailyFX Fundamentals 01-19-05
By Kathy Lien, Chief Strategist of www.dailyfx.com
· Euro Breaks Below 1.30 On Positive US Economic Data
· Stronger Labor Market Data Helps Sterling Rally Once Again
· Japan Keeps Assessment Of Economy And Rates Unchanged
The Euro is trading at a 2 month low against the US dollar after having broken below the psychologically important 1.30 level. Better than expected US economic data and more optimistic comments from Fed Presidents have given bulls a good reason to rally the dollar for the fifth consecutive trading day. Tomorrow is President Bush’s second inauguration, which could bring modest event risk. For the time being, the rally in the dollar is fairly clear. However, we continue to caution against becoming overly optimistic. Although the rebound in the dollar since the beginning of year has been fairly impressive, there continues to be talk about possible distortions in yesterday’s TIC data. Taking a closer look at the data, we see that November is historically a strong month for portfolio flows. The current influx of foreign investments is only $7.3 billion higher than was reported in November 2003. Yet, the trade deficit is $20 billion higher for the same benchmark period. This means that over the medium term, the dollar needs to continue to depreciate in order to fix the imbalances. Over the short-term though, the strong headline number has turned the funding of the deficit into a back burner issue. In an interview with CNBC, Warren Buffett continues to be dollar bear. If you recall, he has been shorting dollars since 2002. More interestingly though is the fact that he is finding it difficult to identify stocks that are good buying opportunities. Instead, he is now looking at businesses that make their money in other currencies or stocks that are denominated in other currencies. As a billionaire investor who manages one of the world’s biggest funds, Buffett’s trading activities carry significant weight in the markets. This sentiment may be more widespread than the market may expect. The November TIC data indicates that US investors have increased their purchases of foreign stocks during the month of November, making overall net equity flows actually negative for the month. If this trend continues, portfolio flows could take a sharp plunge in December. Although the market appears to have buried the hatchet on the deficit for the time being, it could easily become a skeleton in the closet that will come back to haunt us sooner rather than later.
Generally better than expected US economic data has helped the dollar rally to 2-month highs against the Swiss franc. Jobless claims for the week ending January 15 fell by the biggest amount in 3 years to 319k from 367k. The strong report has certainly boosted the outlook for January payrolls and the labor market as a whole. The housing market continues to chug along with housing starts increasing 11% in the month of December, which was the biggest rise in 7 years. The current level of interest rates is still attractive to home buyers, and thus far, the housing bubble continues to expand. Although headline consumer prices dipped last month, core prices continue to grow at a steady monthly pace of 0.2%. Headline CPI fell in tandem with PPI released last week reflecting the correction in oil prices. Overall, the economy appears to be doing fairly well. The Beige book report released this afternoon draws a similar conclusion of improving consumer spending, manufacturing and service sector, housing and labor market performance. However, as evidenced by today’s CPI report, inflationary pressures remain relatively subdued at this point.
The pound rallied against the dollar and the euro for the second consecutive day. Adding a bit more uncertainty to the outlook for UK monetary policy was more encouraging labor market data released this morning. Average earnings increased to 4.2% while the number of individuals claiming unemployment benefits fell a more than expected 6.2k. The UK continues to enjoy a buoyant labor market, which follows the up-tick in inflation that was reported yesterday. These reports have helped to quell speculation about a possible interest rate cut by the Bank of England next month. Although the central bank has become increasingly dovish and the minutes from the last meeting indicated that at least 2 members wanted to discuss easier monetary policy, mixed data over the past few weeks will make it difficult for the BoE to react preemptively.
As expected, the Bank of Japan kept interest rates unchanged once again at their monetary policy meeting last night. They also left their assessment of the economy intact, noting that the Japanese economy continues to recover though signs of weakness in production are prevalent. Japanese Finance Minister Tanigaki and Bank of Japan Governor Fukui both expressed modest concern about yen appreciation. Tanigaki warned of the possibility of official action if FX activity becomes “abnormal” while Fukui stressed the need for stability in FX rates. However, with the G7 meeting scheduled to be held in a few weeks, intervention is still unlikely to occur unless there are sharp spikes lower in USDJPY.
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