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Monday February 28, 2005 - 22:49:18 GMT -

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Forex: Rising Chicago Manufacturing Activity Signals Stronger National ISM Report

DailyFX Forex Fundamentals 02-28-05

By Kathy Lien, Chief Strategist of

·Rising Chicago Manufacturing Activity Signals Stronger National ISM Report
·Inflation Dips in Eurozone
·Strong Japanese Data Sends Yen Soaring


Despite the plethora of both European and US economic data released today, the euro was stuck in a dreary 50-pip trading range against the US dollar. This week’s biggest events have yet to come with ISM not due for release until tomorrow, Greenspan speaking on Wednesday and non-farm payrolls on Friday. Euro bulls do not seem to be giving up despite significantly weaker economic and business confidence. Inflation also slowed to a 10-month low with headline CPI falling from 2.4% to 1.9% and core prices, which excludes food and energy falling from 1.9% to 1.6%. Inflation has finally dipped back below the ECB’s 2% target, which means that they are beginning to have the flexibility of lowering rates. However, one month of the data is too early to make a trend especially since oil prices have been rising significantly throughout the month of February. Yet, the Eurozone really needs another rate cut to spur growth. If you recall, both Germany and Italy reported negative growth for the fourth quarter of 2004. The strong euro has taken a significant toll on the Eurozone economy. If the ECB announces that they are cutting rates for the first time in over a year and half, this would not only help to spur growth in the region but also to take away some of the bullish bias present in the EURUSD.


The dollar is once again weaker against most of those majors despite a 0.3% rise in the core PCE index, which is the Fed’s favorite measure of inflation. The stronger than expected Chicago PMI report provided no support for the greenback. According to the report, manufacturing activity growth accelerated for the second consecutive month as both orders and employment in the region picked up. So ahead of tomorrow’s national ISM survey, the scorecard looks like this - stronger growth in both the Chicago and Philadelphia region but weaker growth in the NY region. Correlation is generally the strongest between the Philadelphia survey and the ISM survey. However over the past few months, this correlation has broken down quite a bit given recent volatility in the Philly Fed Survey. Expectations though are still for another rebound in the ISM report. Meanwhile the housing market is beginning to show signs of weakness. New home sales fell 9.2% in January, which was well below expectations. This follows Friday’s 0.1% decrease in existing home sales.


Rising further in the session, the British pound hit a two-month high of $1.9260 as bullish momentum spilled over from last week’s rally. Economic data was relatively thin with the GFK consumer confidence survey showing steady results. Compared with last month’s reading of 1, the report showed relatively no improvement with a 0 figure in February. Additionally, money supply growth slowed in Europe’s second largest economy by 5.9 percent on an annualized basis, slightly below expectations of a 6 percent rise. As a result, market players will be focusing on tomorrow’s line up including the Nationwide house prices report, net consumer credit, CIPS PMI manufacturing survey and the much-anticipated CBI distributive trades report. The latter is particularly of interest as it reflects the increase or decrease in retail sales activity and is likely to influence short term interest rate decisions by Bank of England policy officials. Participants will look for evidences of higher individual consumption through a larger figure. Additionally noteworthy has been increasing political risk implications ahead of the U.K general election as the once popular Labour party has seen its lead in the polls narrowed. With rising fears of uncertainty, market participants may be wary of new positioning until a clearer ruling can be ascertained.


The Japanese yen advanced today on bullish expectations after government reports revealed rebounds in industrial production and retail sales for the world’s second largest economy. In January, industrial production soared higher by 2.1 percent as increased global demand for electronic chips heavily contributed to the positive data. This recent figure demolishes a previous decline of 0.8 percent experienced in the previous month. Retail sales also ratcheted higher by 2.2 percent, the biggest leap in 4 years, as the figure skyrocketed 5.7 percent in the monthly comparison. Additionally, improvement in housing starts and construction orders was also witnessed. Housing starts, also the best in 4 years, climbed 6.9 percent while subsequent construction orders bounced 15.8 percent higher on an annualized comparison. Ultimately, the upbeat reports bolstered a rise in the subsequent equities markets as investors speculated on a short-lived momentum of recessionary conditions. The Nikkei index climbed to 11,740, the highest since July 1, as investors ramped up interest in Japanese shares for the 19th week. All in all, further upside potential for the domestic currency may be forthcoming in light of last week’s overall bearish sentiment. According to data released last week by the Commodity Futures Trading Commission, short yen contract positions grew to the largest amount since March 19, 2004, mounting to 25,935.


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