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Thursday May 19, 2005 - 21:54:25 GMT

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Forex: Dollar Holds Its Ground Despite Weak Philly Fed

DailyFX Fundamentals 05-19-20

By Kathy Lien, Chief Strategist at

· Dollar Holds Its Ground Despite Weak Philly Fed
· Strong Retail Sales Fail To Lend Support to the Pound
· South Korea Says FX Intervention Comment Was Misunderstood

US Dollar

To the befuddlement of traders, the dollar held onto to its gains in face of very weak economic data. For the fourth month in a row, leading indicators forecasted further deterioration in the US economy while the Philadelphia Fed Survey of manufacturing conditions plunged from 25.3 to 7.3 in May. Coming on back of the biggest drop in the Empire State manufacturing survey, we now know with near absolute certainty that the national ISM survey will experience an equally sharp decline. One of the most popular questions that we have been asked today was why the dollar rallied on the weak Philly Fed report. Our answer is a repeat of what we have stressed over the pass few months, that is each piece data is scrutinized for its implications on Fed Policy. The weak Empire State survey and the benign inflation report has already notched down the higher post payrolls expectations formed in the markets over the past few weeks. Even without today’s data, we know that there are at least 2 rounds of tightening left in the pipeline. The Philly Fed survey does little to change that fact. By no means is the release significant enough to cause the Fed to cut short their plans for tightening. Yet from a longer-term perspective, we do find the report discouraging and leaves us skeptical about the prospects for the US dollar in general. A few months ago, we published a piece titled, the “The Fate of the US Dollar,” and we still stand behind our belief that the bigger negative factors weighing on the dollar, such as reserve diversification, implications of Chinese revaluation and the twin deficits will return to the forefront once the Fed is done tightening. For the time being though, the dollar could still muster a rally according to our weekly FXCM Speculative Sentiment Index. The ratio of longs to shorts in USDCHF is –1.03, which is within the extreme +/- 3 range. Shorts have gained a marginal control over longs, with the ratio flipping from net long to net short over the past week. We have been waiting for a flip in the ratio to signal the prospect of further gains in USDCHF, but the narrow margin that shorts have captured reduces the significance of the flip. Nevertheless, the fact that the ratio did flip is still a bullish signal for USDCHF and for as long as shorts continue to retain control over longs, our contrarian indicator tells us that we should see further gains in the pair.


Mixed economic data out of Europe gave the Euro little to work with. Although producer prices in the Eurozone surged a more than expected 0.7%, consumer price growth slowed in the month of April. This keeps a move by the ECB off the table for the time being. Industrial production contracted 0.2% for the second consecutive month in March, highlighting the overall negative vibe that is being felt throughout the region. The possibility of a no vote by the French still hangs in the air, providing no decisive reason for traders to turn bullish on the Eurozone economy.

British Pound

After a session of consolidation, the British pound failed to regain its footing despite a much better-than-expected retail sales figure of 0.5 percent. Immediately after the release of the data, the pound surged for a very short period of time and then encountered an even heavier sell off. The unexpected rise in the retail sales figures was believed to be led by discounts offered in stores during the month of April. Economists considered that the figure, which contradicted the poor earnings of the retailers, did not seem to be a precursor of a rebound in the economy’s recent downtrend.

Japanese Yen

Over today’s session, the yen slowly lost its ground once again and floated back up to 107.65 against the dollar by the end of the day. Today, a monthly government report was released for May and it basically echoed last month’s outlook for a moderate economic recovery with improvements in business profits and investment while private consumption picks up. The only significant change was the upgrade of the export situation to “flat” as opposed to “weakening”. This mediocre statement failed to save the yen as a separate report on international securities transactions over the week of May 8-14 revealed that net foreign purchases of Japanese stocks moved into the red with -¥36.5B from a figure of ¥67.0B in the previous week. Meanwhile, domestic investors bought a net of ¥156.4B worth of foreign securities. Including stocks, bonds and notes, as well as money market instruments, this would be the 5th consecutive week where Japan registered a net capital outflow in terms of portfolio investment. On average, ¥657.3B has been leaving the country each week over the past five weeks. Combined with a “flat” outlook for exports, this is not a good trend in terms of the impact on the currency. Fortunately for the yen, yesterday’s Hong Kong Monetary Authority’s announcement of a widening of their currency peg is lending its support as it potentially represents Hong Kong’s preparation for an upcoming revaluation from China. On the other hand, South Korean authorities said that yesterday’s statement from the governor was misunderstood when it was interpreted to mean that there would be no further intervention or foreign reserve accumulation from the country. Reportedly, the central bank bought dollar-denominated assets as recently as this morning.


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