Wednesday June 2, 2004 - 11:31:34 GMT
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GVI FX STRATEGY SESSION -- NY OPEN--
Forex trade has gotten off to a mixed start on Wednesday, as it appears that many are looking for direction. Some have seized on an increase of +0.6% in April German Retail Sales as a reason to buy euros, but keep in mind that the year on year comparison was -1.8%. A pick up in German consumption may be still in the works, but it has yet to have been clearly demonstrated. Nevertheless the ECB should like a firm eur/$ because it dampens in local currency terms the inflationary impact of rising oil prices. The ECB meets on Thursday. They will not be raising rates and are still unlikely to be ready to do so any time soon.
A lot of ink is being used on the oil markets today. Light Sweet Crude is off is $42.45 high in electronic trade and was last at $41.85. OPEC meets Thursday in Beirut and is expected to ratify an increase in production on the order of 2-1/2 million barrels a day. This would be at or near full capacity, although precise figures on capacity and actual production are hard to come by. The real message is that there is not a lot more product that can be put into the pipeline. Furthermore, the markets are probably more sensitive to terrorist threats to production in the middle east at the moment. Current price levels are only as good as the last headline. The dollar is seen as vulnerable to rising oil prices or a disruption in supply because either would undermine the growth and rising interest rate scenario that underlies its current recovery.
The yen is also perceived as vulnerable to rising oil prices, but has probably sold off today because it got over bought ahead of the Morgan Stanley Capital International Index reweighting last week that added twenty-one stocks to its portfolio. Last week, the market had bought yen in anticipation of strong international demand for yen that never fully materialized. There were rumors that the Ministry of Finance had the bank of Japan in intervening on Wednesday but local sources in Tokyo say that those rumors are pure nonsense. At this point in time we figure that Japanese authorities are most interested in yen stability around current levels as they seek to mitigate the impact of rising oil prices on the economy while continuing to encourage export-led growth. We look for $/yen range work.
As expected, the Reserve Bank of Australia decided to keep rates unchanged at its monthly meeting on Tuesday. Some in the market took this decision as a signal that rates will now remain on hold for the foreseeable future. 1Q04 GDP were a bit weaker than expected and advanced by only +0.2% in the quarter and +3.2% y/y. After the GDP data, the markets dismissed an upbeat speech by Reserve Bank Deputy Governor Stevens who said that Australias economic prospects still remain positive and that inflation is likely to remain within the target range of the central bank. The Aussie$ is soft today but should continue to garner support from its wide interest rate advantage vs. the U.S.
Today sees the weekly DOE and API energy inventory reports. Weekly Chain store sales data are due as well.
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