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Tuesday March 1, 2005 - 22:28:12 GMT
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Forex: Dollar Rallies Despite Retracement in ISM

DailyFX Fundamentals 03-01-05

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

· Dollar Rallies Despite Retracement in ISM
· Euro Weakens As German Unemployment Grows
· Yen Rallies As Japanese Consumers Pick Up Spending

EURUSD

The dollar gained strength against the euro ahead of tomorrow’s testimony by Greenspan on the state of the US economy. According to the Eurozone Purchasing Managers’ Index (PMI), manufacturing activity in the region as a whole expanded at the same pace as it did during the month of January. The manufacturing sector actually improved in France and Italy, but weakness in Germany offset the stronger performance seen elsewhere. German growth is still at risk due to another sharp rise in unemployment. The unemployment rate has now increased from 11.4% to 11.7%. Although much of this can be attributed to the country’s recent labor market reforms, high oil prices, the recent bullishness in the euro and rising unemployment will only take a further toll on consumer spending. With growth still disappointing and softer inflation reported yesterday, the ECB’s monetary policy meeting on Thursday might be particularly worthwhile to watch. Although the European Central Bank is not expected to change rates, ECB President Trichet will still be on the wires talking about the outlook or current state of growth and inflation. If inflation continues to decline, then the ECB will have more flexibility in considering a rate hike since it would mean a lower risk of pushing inflation back above the central bank’s 2% target.

USDCHF

The surprise slowdown in the expansion of the US manufacturing sector did little to stop dollar bulls from propping up the greenback in anticipation of optimistic comments from Alan Greenspan. The Fed Chairman is not expected to make any blockbuster announcements or shed any light on Friday’s non-farm payrolls report. He is however, expected to confirm the need for a continued measured pace of tightening over the next few months, especially following today’s bullish comments from Fed President Santomero. We want to continue to alert our traders to the end of Greenspan’s tenure in January 2006. Although the market still thinks that it may too early to speculate about a suitable replacement, the fact that traders around the world latch onto every word that Greenspan does or does not say, makes it particularly interesting to see who could possibly be a suitable replacement for such an esteemed man. Meanwhile, manufacturers reported weaker growth for the third consecutive month. As we mentioned yesterday, it is particularly interesting how the National ISM survey has recently diverged from the regional Philly Fed and Chicago PMI reports. Of particular concern were the decreases in manufacturing sector employment growth and the contraction in inventories. Yet bulls have certainly found comfort in the fact that the manufacturing sector is still gradually improving, along with optimism from the sharp 0.7% rise in construction spending.

GBPUSD

Like the euro, the pound is also weaker against the dollar despite a 0.5% rise in housing prices according to the Nationwide house prices report for the month of February. This is the fastest monthly increase since November and also a sign that although housing price growth has been slowed down by the interest rate hikes, inflation is making a comeback after the Bank of England left rates steady for 6 consecutive months. Meanwhile, another report released today indicated that U.K. mortgage lending increased £7.2B which was higher than the market’s expectations of £6.9B and the strongest pace of growth since September. Although this data slightly conflicts with last week’s BBA report, which indicated very weak mortgage lending and approvals, it does lend strength to the argument that the housing market is on the move again and data is once again mixed. The CBI distributive trades report also revealed less than desirable current conditions. Sales are lacking with a slight improvement to a balance of only 2% yoy growth, but at the same time 23% more retailers thought sales volumes decreased rather than increased. The only good news from this report was the expectations for strength in consumer confidence and improvement in sales for March. In addition, the CIPS PMI remained unchanged from January while economists forecasted a rise to 52.5, which shows that any growth that still exists is minimal.

USDJPY

Strong Japanese economic data helps the yen to rally for the third consecutive day. Not only have we already seen a nice rise in industrial production, stronger retail trade, and a sharp increase in housing starts, but today, we learned that household spending also grew by the fastest pace since May. Even though the jobless rate remained unchanged at an upwardly revised 4.5%, the job to applicant ratio matched that of November 2004, which was the highest level seen since Jan 1993. January seems to have been a particularly good month in Japan. So good that even Prime Minister Koizumi and BoJ Governor Fukui were hawkish, suggesting that individual households are finally also feeling the economic recovery.

 

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