Monday January 31, 2005 - 22:01:02 GMT
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Canada’s Error Could Lead To Stronger US Growth and Narrower Deficit
DailyFX Forex Fundamenta,s 01-31-05
By Kathy Lien, Chief Strategist of www.dailyfx.com
· Canada’s Error Could Lead To Stronger US Growth and Narrower Deficit
· US Personal Income Soars to Record High On Microsoft Dividend
· Mergers and Acquisitions Announcements Pick Up Steam
To the frustration of many traders, the euro kick-starts the busy week with another unchanged trading day. Although we still believe that the US’ imbalances will lead the euro higher in the medium term, that does not mean there will not be periods of strength in between. This week could very well be one of those weeks that we see potential strength in the greenback. Geopolitical risks have subsided following the fairly peaceful elections in Iraq this weekend. The Philly Fed and Chicago PMI surveys are both pointing to strength in tomorrow’s national ISM report. Merger and acquisition activities in the US has really picked up within the past few weeks spurring optimism for US stocks, President Bush will probably also drum up some more optimism in his State of the Union speech on Wednesday. A clear commitment by Bush to tackle the budget deficit could be bullish for the dollar. As for the Fed, there is no doubt that the Fed will be raising rates by a quarter point on Wednesday. The key once again lies in the FOMC statement. However, the worse that they would probably do is to leave in the word measured in their statement. Recent economic data does not call for them to be any less bullish. With Friday’s weaker GDP report, a more conservative stance by the Fed should not take anyone by surprise. Meanwhile, Eurozone industrial and consumer confidence edged lower in the month of January. According to the latest CFTC Commitment of Traders report, net speculative long positions on the IMM took a sharp plunge in the week ending January 25th.
Dollar bullish news does little for the US dollar. To our surprise, the market completely ignored Canada’s admission to underreporting US imports in the month of November. If you recall, the US trade deficit widened to a new record in November. Such an error by Canada would mean that deficit was much narrower than expected. In fact the US Commerce Department said that the Canadian error could add as much as 0.5% to US Q4 GDP, which could boost Friday’s release to 3.6%. Taking this and the sharp rise in foreign inflow as reported by the TIC data during the month of November in account, we are left with a potentially very positive dollar development. Meanwhile, the other economic data released today was equally positive. Personal income climbed a whopping 3.7% in the month of December, which was the fastest pace of growth on record; the government began keeping records in 1959. A one-time $32.6 billion dividend payment by Microsoft accounted for most of the increase, as income growth net of the dividend is only 0.6%. Generally it is rare for one company’s dividend to have such a significant impact on personal incomes, but Microsoft is one of the most widely held stocks in the US and in fact, the payout was more than the federal income tax rebates forked out by Uncle Sam in the summer of 2001. Chicago PMI jumped to 62.4 from an upwardly revised 61.9 in January. The market had actually expected the index to dip, but a rise in new orders, production, employment and a dip in prices paid helped to boost the index. This suggests that tomorrow’s ISM survey could also surprise on the upside.
The British pound traded lower in reaction to a sharp plunge in the CBI retail sales survey. The sales balance fell to –3 in January from +33 the previous month, which was far below expectations. Retail sales fell significantly in December, and based upon the CBI’s report, this weakness could have carried over into January. However, in line with the broad trend of UK data, not all data released today was negative. The GfK consumer confidence survey improved for the fourth consecutive month, rising into positive territory for the first time since November 2002. Consumers were more optimistic about the outlook for their own finances and think that current conditions present an improved climate for major purchases. Perhaps this could be positive for future retail sales reports.
The dollar traded higher against the Japanese yen for the second consecutive trading session. The Japanese Ministry of Finance reported that they did not intervene in January, which marks the tenth consecutive month that the government has refrained from curbing yen strength, despite a dip down to a low of 101.70 earlier this month. There is certainly no reason that they would conduct intervention this week either ahead of the G7 meeting. Japan is notorious for fearing criticism by their global counterparts at the meeting of central bankers and finance ministers. This forum is a perfect opportunity for finger pointing at China and Japan would certainly not want to do anything to draw attention away from what they deem as China’s unfair practice of suppressing the value of its currency to keep their exports cheap. Comments out of China could once again drive volatility in USDJPY ahead of this weekend’s G7 meeting. However, as we have previously mentioned, China is simply not ready for revaluation. They have previously said so themselves. As such, we expect no blockbuster announcements from them this week.
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