Monday March 21, 2005 - 10:54:08 GMT
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US OPEN MARKET POINTS 03-21-05
Dollar Bulls Start The Week With a Smile
With Asia on holiday, speculators plowed into the dollar at the start of the Tokyo session trying to front run Tuesday’s expected FOMC rate hike. The market anticipates yet another 25 basis point rise, but more importantly believes that the Fed will drop the word “measured” from its communiqué, thus announcing a more aggressive tightening posture. Not all analysts agree that Fed will be so hawkish this time around with Goldman Sachs noting that removal of “measured” would, “create considerable uncertainty about future monetary policy, which would conflict with the FOMC's desire to be transparent.“ Yet with oil hovering at record highs and PPI numbers also due tomorrow, projected to reach 4.7% year over year gain, it’s hard to see how the Fed could be cavalier about the obvious inflation risks building up in the system.
Tonight’s weakness in the EUR/USD is also being attributed to the adjustment of the European Stability Pact which basically “allowed” Germany and France to extend their greater than 3% budget deficits for a while longer without incurring penalties from EU. This hardly constitutes a major fundamental shift, as both Germany and France are unlikely to become instantaneously profligate as a result of this agreement since it clearly calls for members to remain "close to" the threshold and allows the breach to be only "temporary".
A far more likely reason for tonight’s dollar rally are the comments by Saudi Oil Minister Ali al-Naimi who said over the week-end, "We can go up a million and a half barrels per day … The perception in the market is that there is not enough supply, which is untrue. There's plenty”. As result oil dropped back to the $56.00 level in overnight trade. If oil has indeed reached a near term top at $57.50 and continues to trade lower as we approach warmer months in the Northeastern Hemisphere, that fact alone will have a greater positive effect on the dollar than any verbal gymnastics that the Fed could conjure. As we wrote on Friday, for now FX is driven by NYMEX.
FX Spot Overnight
- EUR drops to 3220 as traders position ahead of FOMC
- JPY breaks the 105.00 figure on dollar strength
- GBP falls all the way to 9050 on interest rate differential compression
- CHF positive IP numbers have no effect as the unit blasts through 1700
- 13:30 GMT – (08:30 AM EST) CAD Wholesale Sales m/m (JAN) Expected 0.5% Previous 1.1%
- 13:30 GMT – (08:30 AM EST) CAD Wholesale Inventories m/m (JAN) Expected 1.0% Previous 1.6%
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