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Tuesday February 15, 2005 - 22:28:21 GMT
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Dollar Weakens As Japanese Continue To Dump Treasuries

DailyFX Fundamentals 02-15-05

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

· Dollar Weakens As Japanese Continue To Dump Treasuries
· German and Italian Growth Contracted in Fourth Quarter
· Consumer Price Indicies Confirm Rising UK Inflationary Pressures

EURUSD

Over the past 24 hours, we have received a lot of economic data that could have resulted in some interesting price action for the EURUSD. However, to our disappointment, none of that data had a profound impact on either the euro or the US dollar. The pair has managed to creep back above 1.30, but trading has been cautious ahead of tomorrow’s much awaited speech by Fed Chairman Alan Greenspan on the current stance of the US economy and monetary policy. Greenspan is expected to be bullish on the US economy and reiterate the need for further tightening. A continued measured pace of monetary policy implementation will most likely be the theme of the Chairman’s speech. Meanwhile, the Eurozone is predicted to have grown by a much weaker than expected 0.2% in the fourth quarter with German and Italian growth actually contracting in the final quarter of last year. High unemployment, lower retail sales and weaker exports have brought on the first quarter of negative growth in over a year for the Eurozone’s largest economy. Although it was fairly obvious that growth in the Europe has been exceptionally weak, today’s reports from Germany and Italy confirm that conditions were so bad that they led to contractionary growth. Some investors may have found comfort in the improvement in the German ZEW survey of business sentiment. The recent pullback in the EURUSD has helped boost the outlook for German exports. This suggests that Germany is not headed to a recession quite yet and that as long as the euro stops strengthening against the dollar, the country will gradually be able to pull itself out of its recent slump.

USDCHF

The dollar weakened against the euro today despite slightly encouraging US economic data. Retail sales fell less than expected, decreasing by only 0.3% compared to expectations for a 0.4% slide. Excluding the volatile automobile component, retail sales actually increased a more than expected 0.6%, which means that overall, US consumers continue to spend. This should help to boost manufacturing and provide a positive backdrop for Greenspan’s speech tomorrow morning. The much awaited US TIC data on the other hand increased a more than expected $61.3 Billion, but the details are once again less encouraging with the Japanese selling a net $3.1 billion in December. Japanese demand for US treasuries have been waning for some time now and although some economists suggest that their disposal of US treasuries reflects the changes to the Treasury yield curve that have made US assets less attractive, we point out that the Japanese are still “dumping” US treasuries regardless, and in greater amounts. Given that Japan is one of the world’s largest holders of US treasuries, this is a trend that we are monitoring and will continue to monitor. China and the UK on the other hand boosted holdings of US treasuries while Caribbean holdings fell for the third straight month. Caribbean holdings are important because many hedge funds are incorporated in the Caribbean and the shifts in their assets is frequently linked to changes in the holdings of hedge funds.

GBPUSD

Moving higher on the break of the psychological resistance at $1.8900, the British pound was spurred on by traders in light of rather tepid economic data during the session. Signs that inflationary pressures were slowly dimming were evident through both the U.K. retail and consumer price index. Dropping to 3.2 percent on an annualized basis, retail prices fell in comparison to the previous period. Excluding mortgage interest payments for January, the report posted a 2.1 percent increase, well in line with inflationary targets set by the Bank of England. Consumer prices also declined in the month but were higher than most expected at a dip of 0.5 percent. Remaining the same from the previous month, the report climbed 1.6 percent on an annualized basis. All these reports suggest is that inflation remains tame in light of a continually tight labor market and churning industrial output. As a result, a passive report tomorrow with continually hawkish undertones is expected when the central bank’s inflation report is given. Reported quarterly, the release analyzes the current economic environment and inflationary projections from which policy makers derive future interest rate decisions. Ultimately, traders will be anticipating any suggestions of near term direction in interest rates through the subsequent rhetoric.

USDJPY

Rising on the session, the yen gained as traders increased long positions after government reports suggested a pickup in individual consumption and foreign exports of machine tools last month. Climbing for the first time since June of last year, Tokyo department store sales were higher by 0.7 percent as the data plummeted by 3.2 percent in the previous period. Ultimately, this lends more optimism domestically, albeit momentarily, as the world’s second largest economy has recently been suffering from restrained consumer spending. Additionally, machine tool orders data was released slightly higher at 30.4 percent. Although only incrementally better than the 30.2 percent reported last month, the release suggested continually strong exports. After yesterday’s economic reports shining a potential silver lining on an overall lackluster expansion, market players will be anticipating the Bank of Japan’s decision on benchmark interest rates as policy makers have continued their assessment of deflation and relatively sluggish growth. Although expected to keep the current benchmark rate, subsequent statements by policy makers may lend to some speculative creativity.

 

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