Thursday May 27, 2004 - 11:33:52 GMT
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GVI FX Strategy Session-- NY Open
The dollar continues to suffer from a general malaise at the moment. Rather than the specific daily price swings in the cost of oil, it is being weighed down by the general price level of energy. Euphoria only a couple of weeks ago about the likely impact of a robust U.S. economic recovery has given way to concerns about the persistent high price of oil on prospective economic growth. High oil prices amount to a wealth transfer or tax by the oil producing countries on the consumers of that energy.
From the point of view of the central banks, it does not make sense to combat higher price levels due to a tax with higher interest rates, so the markets have been already starting to rethink their expectations about the extent of a future Fed tightening. Assuming that May non-farm payrolls grew by around +200K or higher as widely expected when they are announced next Friday, seemingly a June 30 rate hike of +25bp is a done deal. Fed Funds futures are running odds in excess of 90% for a hike for that reason. Its the pace of subsequent hikes that is in question. New Bundesbank President Weber today expressed these concerns about how high energy prices are a greater problem for growth than for inflation.
Thus forex markets will be closely attuned to indications about the resiliency of the economic expansion in key economies. The outlook for Japan and China remains generally positive. One forecast has the Topix rising from its current level of 1125 to 1400 by the end of the year as they dismiss as an overreaction concerns about an economic slowdown in China. Interestingly, we have heard almost nothing recently about the impact of the rising price of oil on the Chinese economy. One way to mitigate the impact of rising dollar prices on imported commodities is to let your currency rise vs. the dollar. Europe has been using this strategy for decades, and we suspect that Japan will limit dollar strength against the yen if this suddenly comes to pass for that reason. A key report Friday for Japan will be April Industrial Output, which is seen advancing +4%, after +0.6% in March.
The high yielding Aussie and New Zealand dollars are benefiting from the current state of affairs in global markets and the Canadian dollar is being helped as well by its status as an energy producer. The Canadian picture is being obscured by the upcoming national elections on June 28, where there is a good chance the country will emerge with a minority government. Nevertheless, this bloc of currencies is being viewed as alternatives to the dollar and euro based on high bond yields and on the prospects for demand for their commodity exports.
The terror is a non-specific background worry. The key focus today is Weekly Jobless Claims, which are seen at about 335,000 in the latest week after 345,000 in the prior reading. Also revisions to the preliminary estimates for 1Q04 are due. A modest upward revision to the preliminary estimate to +4.4% from +4.2% is expected.
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