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DailyFX Fundamentals 04-06-05

DailyFX Fundamentals 04-06-05

By Kathy Lien, Chief Strategist of

· ECB and BoE Expected To Keep Rates Unchanged
· Dollar Only Left With Fed Speak To Boost Price Action
· Japanese Yen Extends Slide Despite Decline In Oil Prices

EURUSD - The euro has taken the backseat as the action centers on the Japanese yen. Trading has been very quiet and even though the euro continued to gain strength against the dollar, the move was far from impressive. Stronger Eurozone retail trade and PMI surveys helped to give the single currency some sort of direction in the midst of minimal US economic releases. Unfortunately, the its-so-quiet-you-could-hear-a-pin-drop theme in the market could extend to Monday of next week, as the next significant US economic release, which is the trade balance report does not come until April 12th. This means that for the time being, there is only one thing that can move the market and that is sentiment / positioning. Tomorrow at 10:30 EDT, we will be releasing our latest Speculative Sentiment Index. Looking ahead to tomorrow, we once again reiterate the market consensus view that the ECB will be keeping interest rates unchanged for the 22nd consecutive month. The tone of the statement should also remain the same as last month’s. Many analysts believe that consistent growth over 2% would be required for the ECB to make any sort of move toward increasing interest rates. Activity in the Euro zone has been less than exciting over the past few weeks, so methods to tackle weak growth should be the main focus during the question and answer session. However, when growth is not increasing at a favorable rate, the ECB takes a strong position on price stability rather than growth throughout the statement. Look for this to be the case on Thursday morning as well.

USDCHF - The US dollar continues to quietly give back some of its spectacular gains. The World Bank cautioned today that, “a sharp deterioration in the dollar could result in large capital losses in local-currency terms for developing countries with substantial dollar reserves.” The large portfolio of US dollar reserves held by Asian central banks has always been a major concern for the global markets. Even though this topic has been pushed to the backburner, it does not mean that the problems have miraculously disappeared. One of the primary reasons why it was such a major concern a month or two ago was because the portfolios of these central banks suffer greatly when the dollar weakens. The fear was that if the dollar continued to weaken, there would be a point when central banks would just throw in the towel, start cutting their losses and dump their dollar holdings. Since these central banks are such large holders of US Treasuries, this would have a disastrous effect on the US bond market. However with the dollar rebounding, the fear of dumping has gradually subsided. Unfortunately we will have to wait until next week for the market to turn its focus back to the deficit and the availability of funding by foreign central banks. In the meantime, the market can hope for some action from the heavy Fed speech calendar tomorrow. Lacker, Sanotmero and Poole will all be speaking on various topics - Santomero is the only one who will be speaking about monetary policy specifically. Right now, the market is still only expecting a quarter point rate hike from the Fed in May.

GBPUSD - With the UK elections right around the corner, tomorrow’s Bank of England rate decision will be even more followed by both the Conservative and Labour parties amidst this heated election season. Regardless of the BoE’s decision, it is a lose-lose situation for the Blair and the Labour Party. If cerebral governor of the Bank of England, Mervyn King, and the monetary-policy committee raises target rates, the economy might slow enough to prevent Prime Minister Tony Blair, who holds a narrow five-percentage-point lead, from being reelected. If the committee keeps rates unchanged, it would draw criticism from the Conservative Party and undermine one of Blair’s key achievements in ending government control of the bank. Disregarding the political repercussions, the Bank of England is expected to keep rates unchanged at 4.75%, as inflationary data has been below the BoE’s 2% target, the housing market has been tame, consumer confidence and spending has declined, and the manufacturing sector struggles. The committee meets today and tomorrow and is expected to announce their rate decision at 11:00 GMT (7:00 EDT). Today’s NTC, Deloitte & REC Report on jobs shows recruitment industry indicators holding steady for permanent hiring, but declining slightly for temporary hiring. Tomorrow’s Industrial Production report is expected to swing back into positive growth territory, following last month’s –0.2% reading, on a utilities-sector rebound. Manufacturing Production figures are expected to remain flat month over month. Other major releases tomorrow include the NIESR GDP estimate.

USDJPY- Without a doubt, the action this week has been in the Japanese yen. In contrast to the other majors, the dollar continues to climb against the yen. The currency pair has completely shrugged off the four things that are working to the yen’s favor today. Namely, the retracement in oil prices tied to higher inventory data, the continual belief by the Japanese government that the economy is on the recovery track, a rumor that one of the nine members of the BoJ voted against keeping interest rates unchanged, and the passing of an amendment by the US Senate today that would sanction China for currency manipulation. Although the passing of an amendment does not mean that it becomes a law, it certainly does indicate that the US is trying to put more pressure on the Chinese government to adjust its exchange rate. China will not be attending the G7 meeting next weekend after having done so as a guest for the past 2 meetings. China has said that this is not indicative of possible changes to the country’s FX policy, but it makes us wonder why they have decided to bow out of attending the meeting at a time when pressure may very well increase following the abolition of textile quotas. Yet, in support of today’s move, Japanese leading and coincident economic indicators both deteriorated in the month of February.


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