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DailyFX Fundamentals 02-07-05

DailyFX Fundamentals 02-07-05

By Kathy Lien, Chief Strategist of

· Euro Slides on Long Liquidation
· Eurozone Retail Trade Reverts to Contractionary Conditions
· No Major Announces Made By China at the G7 Meeting


The euro has weakened significantly today, falling over 150 pips against the US dollar. The extension of Friday’s slide can be partially attributed to the weaker Bloomberg Retail PMI surveys released from the Eurozone, but the true breakdown in the EURUSD did not occur until the late US morning. The sharp move lower was based upon no fundamental news and was instead mostly reflective of long liquidation. If you recall, last week, the FXCM Speculative Sentiment index reported extreme conditions in the euro, with longs at record highs. At the time, the EURUSD was trading at 1.3025. Since then the euro has fallen close to 300 pips. According to our internal positioning data as of 1pm EST today, short positions have fallen 36% since the release of the public version of our SSI report last Thursday. This provides strong evidence that changes to speculative positioning could very well be behind today’s move. Meanwhile, in terms of Eurozone economic data, according to a survey by Bloomberg, retail activity reverted to contractionary conditions once again in the month of January. A weak labor market has suppressed consumption in the Eurozone, although improvements in the French and German surveys could provide some cause for optimism. With a light economic calendar this week, we see no reason for the dollar to reverse its recent trend.


The dollar continued to rally against the majors as President Bush unveiled his 2006 budget to Congress. According to his plan, the deficit is expected to fall from $427 billion to $390 billion, which represents an 8.6% decline. With spending cuts in many sectors, the headline number reflects the government’s active efforts to rein in the deficit. However, the plan does not include future costs for the Iraq war and any additional costs related to his proposed changes to Social Security. Meanwhile, as we have predicted, the finance ministers and central bankers of the G7 made no surprising announcements at their meeting in London this weekend. China also refrained from announcing any more aggressive plans for revaluation. This had added fire to the upward rally in the dollar that was first ignited by Greenspan last Friday, who suggested that we are beginning to see adjustments to the twin deficits. This should be a slow week in the US, with the Trade Balance due on Thursday being the only notable piece of data. FOMC voter Gramlich was among the first central bankers to speak this week. He stressed the importance of increased savings in the US and injected some positive on the US labor market by saying that it is ‘not far’ from full employment.


Crashing below the $1.8700/8600 price levels, the British pound declined closer to the three-week low of $1.8524 during the session. Falling precipitously, the price action comes somewhat as a surprise as traders were in fact increasing long sterling contract positions in the previous week. According to the Commodities Futures Trading Commission report, long contracts increased to 19,591, slightly higher by 975. With no U.K. economic data scheduled, traders are widely anticipating tonight’s retail sales monitor release by the British Retail Consortium. An index of retail sales receipts, market participants will be looking for any signs of improving consumer demand in Europe’s second largest economy as previous dips have contributed to suggestions of a domestic slowdown. Subsequently, additional attention will be placed on the upcoming industrial and manufacturing production data in shedding optimism on last month’s disappointing release. Ultimately, both reports will weigh heavily on speculative activity as we approach the Bank of England’s policy meeting this Thursday. Once again, the Bank of England is expected to refrain from adjusting rates since mixed economic data provides no reason for the central bank to act hastily.


The Japanese yen traded near a one month low as expectations of a near term revaluation of the Chinese Yuan dissipated and suggestions of potential intervention efforts was noted. Commenting to news agency Xinhua, Chinese central bank Governor Zhou Xiaochuan refuted allegations that the domestic currency was currently undervalued, suggesting revaluation was far from being considered. Additionally adding to selling pressure were comments made last week on the eve of the G7 meeting. Commenting to reporters upon his arrival to London, Bank of Japan Governor Toshihiko Fukui noted that “excessive volatility” was undesirable in currency fluctuations and should be justified by economic fundamentals. As a result, traders pared back positions, leading the yen to hover around the 105 psychological resistance level. Ultimately, downward selling pressure may increase in the short term as government reports on bank lending and overall household spending are expected to disappoint to the downside when released tomorrow. This would definitively contribute to the notion of a temporary slowdown in the world’s second largest economy.


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