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Thursday January 27, 2005 - 22:27:23 GMT
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Dollar Rallies Modestly On Better US Economic Data

DailyFX Forex Fundamentals 01-27-05

By Kathy Lien, Chief Strategist of www.dailyfx.com

· Dollar Rallies Modestly On Better US Economic Data
· Euro Weakens As Outlook Dismal For German Labor Market
· Pound Expected To Test 1.90

EURUSD

Better US economic data only helped the dollar rally modestly against the euro. Although the pair continues to range trade, speculation that next week’s German unemployment report could be exceptionally weak has also dampened prospects for the euro. According to Die Welt newspaper, unemployment is expected to increase by 490,000 to a record high of 4.96 million. The sharp rise is primarily expected to come from changes in the labor market calculation. Schroeder is now including former recipients of social-welfare benefits into the jobless register. Leaks frequently happen with the German labor market report and have historically proven to be fairly accurate. Ahead of tomorrow’s US GDP report, this is all the market really has to work off of today. Overall though, we continue to point to broader factors that should lead to the dollar’s demise over the medium term. We have previously raised the red flags on the trend of central bank reserve diversification. Yesterday, the director of China’s state-owned National Economic Research Institute said that "The real issue for China is how to change the regime from a U.S. dollar pegging to a more flexibly managed floating system with a more diversified reference to a basket consisting of say euros, yen, dollars." As one of the largest owners of US Treasuries, a move to a managed float based upon a basket of currencies would certainly be positive for the euro and negative for the US dollar as well as the US bond market.

USDCHF

The dollar is stronger today as US economic data provided cause for optimism. Durable goods orders increased 0.6% during the month of December. Although this was slightly less than expected, there was also a strong upward revision to the previous month’s report from 1.4% to 1.8%. Orders less transportation also rose strongly, rising 2.1% compared to expectations for a 1.3% rise. Labor market data was also encouraging. Jobless claims came in much better than expected for the second consecutive week, rising 325,000 over the past week. The help wanted index edged higher from 36 to 38. This data is consistent with job growth of 150,000 or more. Meanwhile, conflicting comments about China continue to come across the wires. US Treasury Secretary Snow urged China to be more “flexible” with their exchange rate and reiterated the US’ strong dollar policy. China’s Central Bank Adviser Yu on the other hand told the US that they should fix their own finances and not put pressure on China. The battle of words continues to heat up with neither side budging and we expect this to be the theme at next weekend’s G7 meeting - that is, talks that lead nowhere about the Renminbi.

GBPUSD

The British pound rallied for the second consecutive day despite a dive in the CBI Quarterly Industrial Trends survey. The index fell from –4 to –13 in January, which is the first decline in 15 months. This indicates that the manufacturing sector is still struggling. The high price of raw material such as oil has crimped profitability. The latest report reflects the divergence between the performance in the UK’s service and manufacturing sectors. Better than expected fourth quarter GDP growth was primarily driven by strength in the service sector. The FXCM Speculative Sentiment Index released earlier this morning can help to explain today’s price action. The ratio of longs to shorts in the GBPUSD is -1.23, which is within the extreme +/- 3 range. However, for the first time in 5 weeks, positions have flipped from net longs to net shorts. Open interest increased 23%, with shorts rising 67% and longs falling 7%. Short positions are at their highest levels in 9 weeks, suggesting that the GBPUSD could break its recent consolidation for a move towards 1.90. The recently strong GDP report has spurred optimism in the pound, which could provide support for a move upwards.

USDJPY

Last night’s retail trade data for Japan came in rather weak compared to expectations. Economists expected large retailers’ sales to recover to -3.5% y/y from last month’s -5.3% y/y, but the actual data showed a change of -4.2% y/y. Retail trade was expected to show slight expansion on both m/m and y/y measures, but there were declines reported for both. This is probably what caused the yen to weaken to about 103.5 today. Once the US market opened, there was a steady appreciation and eventually, the pair dipped below 103.0 for a short time before starting its journey back up again in anticipation of data to be released later tonight. The BoJ already put a damper on the expected data in their monthly economic report saying that although they still see expansion in the country’s future, recent activities (or lack thereof) in production and IT-related goods have presented a negative blip in the growth picture. Employment data should stay constant while household spending is expected to improve slightly, but price data should be negative for the most part as the country is still unable to shake off deflation. In the BoJ’s report, there were warnings of downside risk in consumer prices due to reduced telephone and electricity charges. Industrial production in December is also expected to be quite weak, changing -1.2% m/m.

 

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