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Friday April 29, 2005 - 21:53:28 GMT

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Forex: Dollar Shifts Focus To Tuesday Fed Meeting

DailyFX Fundamentals 04-29-05

By Kathy Lien, Chief Strategist of

· Dollar Shifts Focus To Tuesday Fed Meeting
· Yen Rallies With Chinese Revaluation Back In The Limelight
· Pound Looks Ahead To Election Week In the UK

US Dollar

Moving on to the Fed! The first half of next week will be dominated by the FOMC rate decision on May 3rd. This time last week, we had hoped for the upcoming week’s data to give us clearer insight on what changes, if any, that the Fed be making to their statement. Unfortunately, this week’s data has only made forecasting the changes even more difficult, which means that the dollar is still at risk next week as the market remains divided on whether the Fed will be saying goodbye to the phrase “measured.” A few of the things that we do know is that GDP growth slowed in the first quarter, durable goods orders tumbled and consumer confidence declined. However, inflation indicators came in higher than expected, home sales were exceptionally strong while the energy-induced slowdown in consumer spending has been much tamer than most analysts expected. From today’s data alone, we see that personal spending once again outpaced personal income. Even worse though was the report that the US household savings rate fell to the lowest level since October 2001. Even for this sole reason, the Fed will need to increase interest rates to spur savings. Last month, the Fed did everything but remove the measured phrase, and even up till today, most banks have been quiet about whether the phrase will disappear next week. Our friends at IFR are one of the first to postulate that it may be time to say goodbye to the measured phrase given the recent acceleration in inflation. Once again, expect the market to hang onto Greenspan’s every word.


The Euro has had a pretty bad week with the single currency unable to even muster one day of solid gains. In fact, today’s data did include slivers of hope, namely from the German retail sales report which held steady for the second consecutive month. Analysts had originally expected sales to dip sharply in March as a result of high unemployment. The German government also slashed its 2005 growth forecast from 1.6% to 1.0%, which was in line with recent speculation. France isn’t performing all that better either. Unemployment hit a five-year high last month with the number of unemployed people rising from 4000 to 7000. The unemployment rate also edged higher to 10.2% from 10.1%. As a result, it doesn’t surprise us one bit that economic sentiment in the Eurozone as a whole weakened for the second consecutive month. Overall, weak growth and the increasing likelihood of a no-vote by the French on the EU constitution next month continued to underpin the euro. Trading should be thinner than normal next week with many holidays on the calendar for Europe, Australia and Japan.

British Pound

Lack of market-moving data out of London kept the British pound relatively flat against the dollar today, moving slightly higher on strong housing numbers only to give up most gains. March mortgage approvals registered at 91K, beating analyst forecasts of 84K and February’s 86K. Additionally, consumer credit unexpectedly increased. The data releases come a day after April’s seasonally adjusted nationwide housing price figures registered at 0.9%, increasing at their fastest pace since July 2004. A recovering housing market could result in a sooner-than-expected 25bp Bank of England rate increase, which some believe may occur at their next meeting on May 9th. Sterling overnight cash rates have been at 4.75% since August 2004, and BoE minutes suggest increasing support for a rate increase. In the coming week, there may be election-induced volatility as the markets await results from Thursday, May 5th’s British presidential and parliamentary elections, in which Blair and the Labours are expected to remain in control.

Japanese Yen

The biggest mover in the currency markets today was undoubtedly the Japanese yen. As we signaled in yesterday’s FXCM SSI report, there was definitely more room for the yen to move lower following the flip in positioning from net shorts to net longs and the sharp rise in long positioning in general. The catalyst for today’s sell-off was what we have been warning would be catalyst for a USDJPY’s demise for some time, and that is Chinese revaluation. This time, it was the Chinese themselves that spurred the speculation. According to a front-page article in a Chinese state run paper, recent reforms have made conditions “ripe” for changes to the Yuan’s exchange rate. Admittedly, the People’s Bank of China did announce shortly thereafter that this does not represent the central bank’s view and is “just analysis by some financial experts.” What we do want to emphasize is that this article was published in a state run paper, not an independent one. This sort of “yes-no” mixed message that the Chinese government is sending out only tells us one thing, which is that at bare minimum, the Chinese government is indeed closer than we may think to revaluing their currency and may be trying to get speculators thinking about the inevitable move. We have repeatedly said that the yen would be the primary currency to use to play intervention because of the two countries’ close trade ties. If talk of pegging to a currency basket surfaces rather than just a shift or widening of the trading band, then the euro would be next in line to react. Meanwhile, next week is the Golden Week holiday in Japan, which means that for the most part, the Japanese markets will be closed for most of the week.


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