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Friday May 13, 2005 - 22:01:38 GMT

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Forex: Will The TIC Data Make The Dollar Tick Higher?

DailyFX Fundamentals 05-13-05

By Kathy Lien, Chief Strategist

· Will The TIC Data Make The Dollar Tick Higher?
· Euro Slides To Six Month Lows As Italy Flirts With Recession
· Pound Prepares For Busy Week Ahead

US Dollar

Dollar bulls have been charging full steam ahead thanks to this week’s exceptionally strong economic data. Even in the face of today’s weaker reports, there have yet to be any signs that their conviction may be wavering. In this morning’s Daily Market Brief, we talked about how important the 1.25 level is for the EURUSD. Whether the dollar can hold onto its gains next week and attempt to test the 1.25 level (which isn’t really that far away) still remains up in the air. We are expecting the all-important Treasury International Capital Flow (TIC) report as well as the consumer and producer price indexes. In January and February we saw exceptionally strong foreign purchases of dollar denominated assets. This month’s report holds lesser significance (unless of course there is a huge surprise) given the sharp contraction in the US trade balance. This time around, the $55 billion trade balance will not be as difficult to fund, especially since inflows have averaged $88 billion over the past 2 months. Economists are predicting foreign demand to subside marginally with foreign inflow falling by $14.5 billion to $70 billion in March. In February, Japan and China upped their purchases of US Treasuries after being net sellers in January. As always, with such heated talk of possible Chinese revaluation, we will be paying particular attention to the strength and direction of Japan and China’s appetite for US Treasuries. In regards to inflation, core prices will be even more important to the Fed than in recent months now that oil prices are at their lowest level in three months. In terms of today’s economic data, business inventories fell short of expectations in March, import prices slowed less than expected last month while consumer confidence, as measured by the University of Michigan Sentiment Survey deteriorated in May.


The Euro has now weakened to six-month lows against the US dollar. Softer French consumer price acceleration on top of yesterday’s weaker German numbers provided euro bears with yet another reason to remain bearish on the single currency. Renewed talk of Russia repaying $15 billion to the Paris Club has failed to lend support to the euro. With the threat of recession hanging over Italy and the Netherlands, there is little hope that Europe will be bailing itself out anytime soon. The economic calendar for the Eurozone next week is relatively light with a few inflation numbers from Germany, Italy as well as the region as a whole. France will also be reporting their preliminary GDP report. With consumer spending contracting for two consecutive months in the first quarter, growth in the Eurozone’s second largest country will be lackluster at best.

British Pound

It has been a bloodbath in the British pound this past week with the currency pair sliding 400 pips against the US dollar to six month lows. Taking a step back, over the past few weeks, we have been talking about the importance of economic data to the British pound. With so many speculators loaded in GBPUSD carry trades each piece of economic data is assessed by weighing its potential impact on the central bank’s monetary policy decision. This week, the British pound collapsed because overall the economic data released decreased the likelihood that the BoE would be saving the British pound with another rate hike. Both the manufacturing and retail sectors appear to be turning sour with industrial production contracting for the third consecutive month, and retail sales taking a 1.3% dive in the month of April. The central bank also downgraded their growth forecasts marginally in their Quarterly Inflation Report. In fact, there was even a rumor floating around that the BoE may be considering lowering rates at their central bank meeting. In the week ahead, there are a lot of significant economic data expected out of the UK. This includes housing market, inflation, unemployment and retail sales data.

Japanese Yen

Broad dollar strength has sent the greenback soaring to one-month highs against the Japanese Yen. The whirlwind of speculation surrounding Chinese revaluation over the past few weeks has calmed down somewhat with China’s central bank Governor Zhou Xiachuan rejecting any speculation that the Chinese would time a revaluation announcement with the expansion in the domestic foreign exchange market beginning May 18th. The Governor flat out said that the media reports on the expected appreciation of the Renminbi on May 18th are completely unsubstantiated. His comments come after a report in the People’s Daily Newspaper suggested that the country’s currency would be revalued next week. In fact, some economists from the major investment banks put the timing of intervention as early as sometime over the next month. Whether this is true or not remains to be seen, but revaluation is inevitable and when it does occur, USDJPY will be first to react.


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