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Tuesday March 15, 2005 - 21:31:15 GMT -

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Blowout TIC Data Fails To Have Much Underlying Strength

DailyFX Fundamentals 03-15-05

By Kathy Lien, Chief Strategist of

· Blowout TIC Data Fails To Have Much Underlying Strength
· Euro Shrugs Off Stronger ZEW Survey
· Yen Rallies As Japan Sells US Treasuries


With a busy global economic calendar today, it should be no surprise that there were a lot of interesting price action in the markets. The highlight was of course the much-awaited TIC data, which came in far above even the highest analyst estimates. Yet, the dollar rally was limited since the details of the report were less bullish (more in dollar section). Across the Atlantic, the market shrug off a better than expected ZEW survey. The index rose from to 36.3 from 35.9 in the month of March, which is the fourth consecutive monthly rise. The current conditions component however, did not improve which was probably why there was muted reaction in the EURUSD. Last Friday we talked about how the Euro is entering levels that may draw verbal intervention from the ECB and in fact today we saw the latest voice of concern by Italian Prime Minister Berlusconi, who urged the ECB to take action on the euro. ECB Weber also nodded to the risk of a further rally in the euro, though he did not offer a possible solution. Tomorrow, OPEC will be announcing their decision on oil production. There have been a lot of mixed comments coming across the wires today, which indicates that they have yet to reach a consensus. From the US, we are anticipating the quarterly current account balance, which will once again draw attention to the burgeoning deficit.


The dollar took off against the majors as foreign purchases of US assets increased a whopping $91.5 billion. Based upon the report, capital inflow in the month of January was more than sufficient to fund the deficit for the same period. Demand for corporate stocks remains strong, but the most notable increase in demand was for US treasuries. Purchases of treasuries soared from $8.3 billion in Dec to $30.7 billion in Jan. Looking at the details though, we still remain concerned. 75% of the treasury purchases (or $23 billion) were from the Caribbean, which can be very volatile since it represents hedge fund activity. Central banks on the other hand continued their liquidation. Japan was a big seller, disposing $10.2 billion dollars, marking the biggest dumping of treasuries in at least 6 months. It was the second consecutive liquidation and the fourth month out of six that Japan has been a net seller. China also bought the smallest amount of US treasuries in at least 6 months, increasing purchases by a paltry $0.7 billion. South Korea sold US treasuries for the second month in a row, which confirms the government’s latest comment that Asia can no longer fund US consumption indefinitely. Today’s TIC report is clear proof that the underlying trend of reserve diversification is indeed occurring. If this trend continues or exacerbates, the dollar could face further downward pressure as possible one-off purchases from hedge funds into the dollar’s strong rally during the month of January may not last. Hedge fund activity can turn on a dime, especially given the euro’s rebound in February.


Even a much stronger than expected RICS house price balance couldn’t help the pound escape dollar strength. This is the third month of improvements and the strongest since October according to the report by appraisers. However, this report contrasts with the deterioration that was reflected in the ODPM house price report released yesterday. Although, the RICS report is more volatile than other indices, taking both reports in conjunction, we see that overall there is no clear evidence that a sharp deterioration is occurring in the housing market. Meanwhile politically, the popularity of Tony Blair’s party over the Tories continues to shrink. The latest survey indicates that the Labour party only has a 5 point lead, which is less than half of their 12 point lead last month.


The action today was in EURJPY and not USDJPY. In contrast to all of the other majors, the dollar actually weakened against the Japanese yen. Yesterday’s upward revision to GDP, today’s retracement in oil prices and the most recent evidence that Japan is indeed selling US treasuries has all contributed to today’s rally. The Bank of Japan will be announcing their monetary policy decision tomorrow. Although no changes to rates are expected, all eyes will be on comments from Fukui. The Bank of Japan is also expected to upgrade their assessment of the economy in their March report. This is the first step that they need to take to pave the way for a change in monetary policy. Yet a change will not be immediate. As recent as today, Finance Minister Tanigaki was on the wires urging the BoJ to stay on track. He said that recent data indicates that deflation is not over. Therefore, it is “necessary that the central bank continue to implement effective measures to overcome deflation.” In terms of currencies, he reiterated the government’s commitment to take action in the FX market if there are “excessive, speculative moves” in USDJPY.


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