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Thursday April 21, 2005 - 21:54:43 GMT

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DailyFX: The Euro – Losing Its Allure

DailyFX Fundamentals 04-21-05

By Kathy Lien, Chief Strategist

· The Euro – Losing Its Allure
· Dollar Gets Its Wings Back Thanks To Philly Fed
· Pound Falters On Weak Retail Sales


After four days of consecutive gains, the euro may finally be losing its allure thanks to an exceptionally strong Philadelphia Fed Survey. The single currency originally managed to hit a one-month high of 1.3127, as Greenspan gave his stamp of approval on the need for faster Chinese revaluation. Price action intra-day has been much more interesting than the daily outlook. The currency pair has been trapped in a broad 350-pip range over the past 4 weeks. On average, the daily range has also been contracting. With mixed US economic data, prices caught between two sets of major moving averages, and the Dow seeing its biggest one-day gain and loss since April 2003 in the same week, means that the market must be scratching its head on what changes, if any that the Fed will make to their FOMC statement in less than 2 weeks. What we do know for sure though is that prices are unlikely to hang out at current levels for long. In fact, there are a lot of important data left in the calendar before the Fed meeting, so expect prices to move out of this pre-summer lull soon. Meanwhile across the Atlantic, economic data was mixed overnight. French consumer spending fell by a surprising 0.8% during the month of March, which comes in sharp contrast to the 0.1% rise that the market had originally anticipated. Even with the second consecutive decline, for the quarter, consumer spending is still 1.4% stronger than Q4. On a positive note, Italian consumer confidence rose strongly while German Finance Minister Eichel dropped a hint to markets when he said that first quarter GDP may have grown strongly.


Based upon today’s price action in the dollar, it is clear that stronger US economic data outweighed the disappointments. To the frustration of dollar bulls, the price action lacked significant conviction in face of questionable details. Jobless claims took a sharp 36,000 dive to a 10-week low 296,000. Yet even though this is a really bullish number, a labor spokesman held back any excess enthusiasm when he said that the earlier Easter holiday is still having lingering effects on the labor market. Leading indicators fell by the largest amount in 2 years as the rise in oil prices dents consumer confidence. The highlight of the day however was the sharp surge in the Philadelphia Fed survey from 11.4 to 25.3. Given last Friday’s dip in the Empire State manufacturing survey, the market had adjusted expectations for a similar decline in the Philly Fed. Improvements were seen in nearly every component of the report, with the prices paid component recording the biggest jump. To the market, these reports are simply hints of how the national ISM survey may be released. Historically, the Philly Fed survey has a tighter correlation with the ISM, but the relationship has deteriorated as of late with the ISM gradually declining while a few spikes have been seen in the Philly Fed report.


Today’s economic data put an end to the pound’s four-day rally and a slight kink in Blair’s re-election campaign. After last month’s deceleration in retail sales, economists had predicted growth to rebound and advance to 0.4% from 0.3% in February. However, the data was far from exciting as it showed that sales actually contracted by 0.1%. The general picture for UK retail sector has been shaky at best recently with this being the fourth decline out of the past nine months following a nice period of 13 months of uninterrupted growth. Consumers seem to be more reluctant to spend as mortgage costs threatened to increase. At the same time, the amount of discretionary income that is available for consumers continued to shrink as energy costs grow. This release also spells bad news for the May rate decision as committee members may put more weight on the retail sales data due to the contradictory nature of several recently released housing market figures from various sources. Blair can’t be too happy about this either as the economy is failing to cooperate with his campaign of uninterrupted growth. Come election time, it could be difficult for voters to focus on the improving conditions of the past 8 years with the recent downturns still being fresh in their minds.


The yen showed significant strength in afternoon trading today after first sliding past 107.40 this morning on last night’s trade balance data. The Japanese trade surplus shrank as import growth outpaced increases in exports for another month. This time, the difference was less drastic as there was a 7.8% boost in imports accompanied by a 6.2% rise in exports. Unfortunately, this follows a more optimistic growth gap from median estimates of 5.0% and 4.9%, respectively. Waning demand from the US and worsening growth prospects for the Eurozone basically leaves China as one of Japan’s last hopes for export growth. Meanwhile, a revaluation for the yuan is looking to be closer on the horizon with new comments from Greenspan today adding to the recent surge of legal and diplomatic pressure on the Chinese government. Whereas previous comments made by others have alluded to revising the peg to include a basket of currencies, Greenspan recommended an outright float. He cited the fact that the central bank’s need to buy dollar denominated instruments to counteract positive pressures on the yuan are channeling the government’s resources from other areas. Shortly after this statement was made, we saw buying pick up in the yen as investors realized that a revaluation would allow other major Asian currencies to appreciate without the fear of losing export price competitiveness against an unrelenting yuan.


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