Friday May 21, 2004 - 19:35:11 GMT
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IMF to Upgrade Japanese Economic Outlook
Daily Forex Report 05-21-04
·Greenspan Avoids Commenting on Monetary Policy
·G7 and OPEC Meeting This Weekend – OPEC Expected to Increase Production
·IMF to Upgrade Japanese Economic Outlook
The dollar gave up some of its gains as Greenspan remained tight lipped about monetary policy in his speech last evening. This past week has been rather dull since we received no new information on the global economy. The market is still working with last week’s assumptions that growth and inflation has reached the point where the Fed will be forced to deliver their first rate hike on June 30th. In the week ahead, trading in the euro should revert back to normal, as we are expecting a significant amount of important US and European economic data. Supporting the gains in the euro today was a report by Market News International that the IMF annual staff assessment says that rising domestic demand is providing early evidence that the cyclical stagnation in the Eurozone may be coming to an end. However, before traders get too excited, the report also suggests that risks remain tilted towards the downside. The preliminary first quarter French GDP report released on Wednesday showed higher growth, which may be initial evidence of accelerating domestic demand in the entire region. The second release of first quarter GDP in Germany is scheduled for Tuesday - the market expects an upward revision.
There are two important meetings this weekend – G7 finance ministers and OPEC. The G7 meeting in New York should not produce much fanfare since it will be focused on the preparation for the topics to be discussed at the upcoming G8 summit involving the heads of state. Central bankers are not scheduled to attend the meeting and officials have made it clear that the meeting will be focused on growth and inflation. We expect the finance ministers to use this opportunity to express their collective optimism about global growth and to express their concern about rising oil prices. Many government officials have urged OPEC to increase production – it is generally expected that they will announce a 2 million barrel per day increase this weekend and a possible further increase at their meeting on June 3rd. This announcement should help to reduce some of the upward pressures on oil prices. However, given that these increases in production may not arrive at gas stations until late July-mid August, consumers may have to put up with higher prices at the pump for most of the busy summer season.
The British pound was a big winner today on speculation that the Bank of England could raise rates again as early as next month. Although this is unlikely, 12 out of 31 economist surveyed by Bloomberg today are forecasting another 25bp increase in three weeks. According to Bloomberg, only 3 economists expected a hike in the same survey conducted last week. Last week, the Bank of England published hawkish inflation forecasts, expecting inflation to move above their 2% target in two years time. They also discussed the possibility of raising rates by 50bp earlier this month. However, given that the current level of inflation remains low and the CPI rate released on Tuesday for the month of April was softer than expected, the BoE may choose to wait a few more months to see if consumers respond to their latest move before raising rates again. The UK is scheduled to release the second estimate of Q2 GDP – economists are expecting continued above trend growth and a possible upward revision.
The yen continues to rally against the dollar as the Nikkei rises 1.92%, its first weekly gain in seven weeks. Adding credibility to Japan’s recovery story, the IMF announced that they will be upgrading their outlook for Japan in their World Economic report in September on the assumption that Japan’s economy may grow by the fastest pace in 14 years. Given less concern about the impact of slowing Chinese growth, the market has refocused on the country’s exceptionally robust growth. Price action in the yen continues to be tied to the performance of the Japanese equity markets.
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