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Tuesday May 17, 2005 - 21:40:05 GMT
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Forex: British Pound Suffers From Longest Losing Streak In Over 4 Years

DailyFX Fundamentals 05-17-05

By Kathy Lien, Chief Strategist of www.dailyfx.com

· British Pound Suffers From Longest Losing Streak In Over 4 Years
· Mixed Dollar Keeps Dollar Steady
· Pressure Back On For China to Revalue

US Dollar

With today’s basket of mixed US economic releases, the dollar remained relatively unchanged against the euro. The two major reports released today were the index of producer prices and industrial production. These days, the producer price index is like an appetizer to the main course, the consumer price index. Even though producer prices advanced by a more than expected 0.6% and core prices, which excludes the volatile food and energy components also rose by a more than expected 0.3%, inflation watchers were unfazed. They are sitting tight and waiting for tomorrow’s more important CPI report to see if producers have had any success at passing these higher costs over to the end buyer. Of course the back seat significance of the PPI report is not the only reason why the dollar has remained relatively steady today. The surprising contraction in industrial production in the month of April also offset any bullishness that would have come out of this morning’s inflation report. Production fell by the biggest amount in 8 months as a result of warmer weather slowing utility output and reduced automobile reduction by companies such as General Motors and Ford who suffered cutbacks in demand for their cars this year. Today’s housing starts data suggested that the US’ real estate market is still fundamentally strong. However, even though housing starts rose 11% in April, the index has been pretty volatile lately with Match data experiencing the biggest drop in 14 years.

Euro

The European calendar today was devoid of any important economic releases. The only piece of news related to the health of the European economy was the German central bank’s warning that first quarter GDP reported last week may have been overstated due to errors in counting the days between the fourth quarter of 2004 and the first quarter of 2005. The first estimate of GDP was 1.0%, which was higher than the market’s 0.5% estimate and a significant rebound from the -0.1% contraction experienced in the fourth quarter. Now that we have received due warning that the first release was overstated, the second release of Q1 GDP next week should be comparatively lower. The central bank said that growth has been hampered by weak domestic demand and limited increases in capital investment.

British Pound

The British pound has now sold off for the eighth consecutive trading session, which is the longest period of continued weakness that we have seen in the currency pair since November 2000. UK economic data released over the past 24 hours gave pound bulls an even better reason to hold onto their shorts. The RICS house price balance fell to –40 from –39, which is yet another piece of evidence that suggests that the housing market is turning sour. Consumer price growth remained steady in the month of April on both a quarterly and annualized basis. Although the figures do not seem to present the market with much upside inflation risk, Bank of England’s Governor Mervyn King warned that the bank is determined take preventive measures to stop inflation expectations from rising. Inflation hasn’t exceeded the bank’s target since 1997.

Japanese Yen

The dollar continue to maintain its hold over the Japanese Yen even in the face of extremely strong Japanese first quarter growth figures. GDP accelerated 1.3% on a quarterly basis and a whopping 5.4% on an annualized basis. The problem with the release was that the blockbuster number was far from blockbuster. Most of the growth was concentrated in January while weak demand for exports was also a cause for concern. Industrial production for the month of March was also confirmed to have contracted for the second consecutive month. Even though the contraction was less negative than initially anticipated, it is still the second monthly contraction in a row. China was also back on the radar today with the US ramping up pressure for revaluation once again. Despite the barrage of attacks on China’s currency policy by US manufacturers and members of the US government throughout the past year, the US Treasury stopped short of branding China as a currency manipulator in their semi-annual report to Congress on exchange rates and trade. However what the Treasury did do is warn China that unless they institute a “substantial alteration” in policy, they would meet the “technical requirements for designation” as a currency manipulator at some point. If they are branded a currency manipulator, it would make it much easier for the Senate to get their proposal for 27.5% tariffs on Chinese imports passed. The US has already hinted to the markets the steps that they want to see China take. Treasury Secretary Snow said that they are not calling for “an immediate full float,” which China is not prepared for. Instead, they want China to take an intermediate step that would allow for a “smooth transition – when appropriate – to a full float.” This intermediate step could very well be what most analysts predict will be China’s first move, which is to widen the band of their trading range by 3-5%. This would only lead to a 1.5-2.5% appreciation of the Renminbi and would not require the Chinese to develop any new infrastructure. Revaluation is something that the US administration is really pushing for, but many believe that China will not bow to international pressure.

 

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