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Dollar Rallies on Greenspan Comments

DailyFX Forex Fundamentals 02-04-05

By Kathy Lien, Chief Strategist of

· Dollar Rallies on Greenspan Comments
· US Non Farm Payrolls Fall Short of Expectations
· Euro Inflation and Retail Trade Data Disappoint


The US dollar rallied against the euro just as most of the market had anticipated, but unfortunately for all the wrong reasons. US non-farm payrolls fell significantly short of expectations, rising only 146k, compared to expectations for a 200k rise and a whisper number of 225k. US corporations added much fewer employees in the month of January and even revised lower their payroll gains in December. This will certainly ease pressure on the Federal Reserve to tighten monetary policy even more aggressively than needed and push back the need for them to remove the word “measured” from their statement. This morning’s price action was exceptionally exciting. The euro soared to a high of 1.3043 on the disappointment, only to fall back to a low of 1.2866 following comments from Greenspan about how market forces are helping to correct the current account. Although Greenspan was not particularly bullish, the market had actually expected him to be uncharacteristically blunt about the need for the dollar to continue to weaken, like he did a few months ago. However, the fact that he opted to air on the side of conservatism took the market by surprise and gave dollar bulls a good reason to buy dollars today. The euro has broken below some key support levels, as predicted by the contrarian signal highlighted by yesterday’s FXCM Speculative Sentiment Index. This could give the EURUSD good reason to extend this week’s sell-off, especially since the US calendar for next week is relatively light. Meanwhile data out of the Eurozone was relatively weak. The flash estimate for January consumer prices forecasts a fall of inflation from 2.4% to 2.1%. Retail trade in the Eurozone as a whole, also increased a much weaker than expected 0.2% in December.


It is hard to believe that non-farm payrolls growth has been much weaker than the market’s forecast for the past 3 months despite clear signs that the economy is improving and that the labor market should be rebounding. Economists have shrugged off today’s decline by saying that “it is not that bad” since at least there is overall job growth and not job losses. However, it is commonly estimated that 150k new jobs need to be created in the economy each month in order to meet the influx of new workers. Yet thus far, we have fell short of that amount for three consecutive months. Furthermore, manufacturing payrolls fell 25k in January. With the downward revisions in manufacturing payrolls for December as well, we have now seen five months of consecutive job losses in the sector. Confidence as measured by the University of Michigan survey dipped lower in the month January as the weaker labor market and higher prices kept consumers from becoming overly optimistic. Although the US economic calendar next week is relatively light, the Fed speech calendar is very heavy, at least one other Fed official speaking every day next week. Also, the beginning of the week will be particularly sensitive to any important comments from this weekend’s G7 meeting.


Staid price action preceded a precipitous decline in the sterling as investors pared back positions in light of optimistic comments of a narrow U.S. trade deficit. With no economic data to cap the end of the week, investors are now focusing their attention on the widely anticipated Bank of England policy meeting next Thursday. Although no moves on benchmark interest rates was previously expected by market participants, rate cut considerations are now a topic of increasing speculation. Attributed to this notion have been recently disappointing retail sales and industrial production data in the past month. Additionally, overall declining housing prices have suggested that previous rate hikes are finally working their way into the economic infrastructure and no further adjustments are warranted despite an uptick in mortgage applications. Surprisingly, interest rate considerations look to be of little concern at the moment with investors adding to their long pound contract positions. According to the latest data provided by the Commodities Futures Trading Commission, long sterling contracts increased in the past week by 975, making the total long interest 19,591 contracts. However, this positioning may shift significantly as we approach the imminent release.


Still relatively consolidated, the yen rose slightly from session lows of 103.28 on the back of comments made by Bank of Japan Governor Toshihiko Fukui. Speaking to reporters in London on the eve of the G-7 conference, Fukui stated that “excessive volatility” in currency exchange rates is undesirable and suggested that this was a shared view among the additional G-7 member nations. He also added that currency fluctuations should be in a stable fashion and justified by firm economic fundamentals. This is coincidentally the same message conveyed to the market last year when the industrial nations met in Boca Raton, Florida. At that time, the market then staged a yen shortfall pushing the currency higher to the 110-price level before resuming the overall down trend two months later. In similar fashion today, traders pared back long positions in the domestic currency and will be looking for further direction as a result of this weekend’s meeting. On the economic front, the leading economic index of the world’s second largest economy disappointed as the release was well in line with estimates. Reported at 40 percent, the index remains below the 50 percent reference in suggesting any type of economic expansion. Subsequently, contraction was also seen for the fourth in five months according to the coincident index.


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