Thursday March 24, 2005 - 22:26:14 GMT
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Forex: Dollar Continues To Rally In Pre-Easter Trading
DailyFX Fundamentals 03-24-05
By Kathy Lien, Chief Strategist of www.dailyfx.com
· Dollar Continues To Rally In Pre-Easter Trading
· New Home Sales Lead US Housing Market Growth
· BoE King Warns About Consumer Spending
The dollar continued to rally in pre-Easter holiday trading despite today’s mixed US economic data. Nearly all of markets around the world will be closed for Good Friday tomorrow, which means that the dollar ended this shortened trading week with phenomenal strength. The biggest question that is on the minds of traders at the moment is whether the euro has more room to fall or if we are nearly done with this painful reversal. Taking a look at some of the interbank research that we have access to, economists from the world’s leading banks have not backed away from their weaker dollar, stronger euro forecasts. Technicals and positioning on the other hand indicate otherwise. The latest FXCM Speculative Sentiment index remains in positive territory, which if taken as a contrarian indicator (as it usually is), indicates that the sell-off may continue for a bit longer, especially since the next major area of support is not until 1.2750/1.2800. Fundamentally, the dollar is benefiting from the Fed’s aggressive tightening measures. However, not much has really changed over the past week. The Fed was eventually going to drop the phrase measured and took a baby step towards doing it on Tuesday. They nodded to the rising inflationary pressures, which is recognition of the impact of higher energy prices. The Fed has previously indicated that they plan on bringing rates back to neutral (approx 3.5-4.0%) and based upon current fundamentals, there is little evidence that the Fed will surprise with a 50bp rate hike at this time. Therefore in retrospect, it seems that even though the dollar had such a strong move this week, the catalyst for the move was something that the market had anticipated even before the Fed meeting.
Mixed US data failed to prevent the dollar from continuing to climb. The housing market was our main focus today as the prices of new home sales reached a record high while its pace of growth was the second fastest ever. Just looking at the housing market here in NY, we see new developments cropping up day after day both in Manhattan and its neighboring boroughs. Although existing home sales in the US have fallen, it seems that it is less of a function of reduced demand, but instead, the fact that construction and management companies have bought up and tore down one-family homes to rebuild multi-unit housing complexes. According to the details of the data, the biggest percent change is indeed in the Northeast and that is exactly what we are seeing right here in NYC. The housing market continues to benefit from low interest rates and an improving labor market. However, in what may be a sign of future trouble, Freddie Mac announced that the 30-Year mortgage rose above 6% for the first time since July. Meanwhile, not all news was good news. US durable goods orders fell short of expectations, rising 0.3% compared to the market’s forecast of 0.9%. Orders excluding transportation fell 0.2% against expectations for a 0.3% rise. Although the headline number was a rebound from previous numbers, the shortfall is certainly disappointing. Jobless claims also rose by 3k to 324k from 321k.
After this week’s bloodbath, the British pound ended the day basically unchanged. In his testimony to the parliament today, Bank of England Governor King tried to provide a bit more clarity on the central bank’s thought process. King said that consumer confidence has been weak which is concerning since it affects retail sales. Also, they are very concerned about labor costs. King noted that, "whether labor costs remain subdued despite a tight labor market is a key uncertainty surrounding the [MPC's] latest forecasts." On the upside though, the housing market looks like it may be stabilizing, while the labor market remains tight, with minimal signs of spare capacity. As a result, inflation has the risk of surprising on the upside, which explains some of the reason why there is so much more division within the monetary policy committee.
This has been the strongest week for the Japanese yen year to date. A stronger tertiary activity index has failed to help the yen recuperate some of its losses. The most interesting component of our FXCM Speculative Sentiment index this week was yen positioning. According to the data, USDJPY was the only pair that experienced an increase in open interest (+18%). Positioning flipped from net long to net short, which suggests that the rally may have more room to go despite contrasting Japanese fundamentals. With USDJPY trading near its YTD high, bears have swept into the markets in force, increasing short exposure by 63% to the highest level in 7 weeks, while long exposure was reduced by 25%. Although we remain yen bears, positioning may continue to drive the pair’s movements for the time being.
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