Friday May 28, 2004 - 11:38:32 GMT
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GVI FX Strategy Session-- NY Open
This is a major holiday weekend for the forex markets with the U.S., U.K, and virtually the entire Continent closed for holidays on Monday. It is also month end. Nevertheless, forex markets are in flux despite reduced dealer participation. The major developing theme continues to be the tempering of expectations about the extent of future Fed monetary policy tightening. By the close Thursday, Fed Funds futures had cut the odds on a June 30 rate hike to 86%. While in absolute terms this still amounts to a sure bet, these odds have been falling all week. Some are starting to raise the issue of the U.S. twin deficits again. The more important deficit for forex markets is the Current Account gap because the U.S. must perpetually draw in funds from overseas to finance this shortfall and the markets recently had been banking on an aggressive Fed tightening to provide this lure.
The Nikkei advanced on Friday by 143 points aided by Japanese share purchases ahead of the reweighting of the MS global equity portfolio index. Japan also registered a large 9.3% increase in April Household spending and a strong 3.3% increase in April Industrial Output, The Spending figures were much stronger than expected and the Industrial production figures fell a bit shy of forecasts. April Core CPI rose +0.2% y/y. changes in dollar sentiment have been perhaps most pronounced in the yen on the past day or so with market forecasts for a 110-115 trading band for the next three months now being revised lower to 108-113 and to as low as 105-110. Our 110-115 view is likely now moving into the 108-113 camp, depending on upcoming data from the U.S.
A key variable in these forecasts will be the price of oil. At this hour WTI has not changed much from its N.Y. close, but there has been word that OPEC will agree on June 3 in Beirut to remove all limits on production and to raise its target price to about $28 per barrel from $22. Eliminating production limits would only affect the Saudis at the moment and they do not have a lot of excess capacity left, so the change would only be a token gesture.
European Consumer Confidence fell to -16 from -14 in May and the May Eurozone CPI rose to 2.5% from 2.0% on a year on year basis, due to oil. This creates a dilemma for the ECB because its CPI target is just under 2.0%. This leaves no chance for a rate cut, but the bank must also decide of it will nurture the economy or combat inflation. The euro is not a stellar dollar alternative. Swiss 1Q04 GDP grew by +0.4% and was up1.5% y/y. The SNB is likely to abandon its ultra-easy monetary policy in June.
Friday morning has a full U.S. economic calendar with April Personal Income and Personal Consumption expenditures due on the open. Later at 13:45 GMT, the May University of Michigan survey will be closely scrutinized. Then at 14:00 GMT, the May Chicago PMI is due. Many markets will be closing early in the U.S. ahead of the Memorial Day holiday on Monday.
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