Monday June 7, 2004 - 11:38:14 GMT
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Forex Dollar Strategy Session -- NY Open
In forex it is often not the news, but how the market is reacting to news that matters. The dollar did not respond positively to a strong employment report for May on Friday and that suggests that weakness has started to emerge from another source. The U.S. recovery is solidly on track and all the journalistic talk about a jobless recovery has now been forgotten. A steady improvement in the jobs market will in itself fuel the recovery. The talk now is back on a steady and not too rapid improvement in jobs. This will provide the Fed with leeway to tighten but not too aggressively. A 25bps rate hike on June 30 is now seen by just about every market survey and the markets as a sure bet. If the dollar is going to rise on the higher rates scenario, it probably needs expectations to change from a measured Fed tightening to a more aggressive path.
One other major event last week that continues to linger as a market factor was the OPEC announcement that it had ratified a two-stage 2-1/2 mln barrels a day increase in its oil production quotas. How the change in quotas translates into actual supply in another question in the opaque world of oil production. Whether the quota change only ratified the production that already was in place and where the production is actually going can only be judged in time. What is clear at the moment is that the news took some of the froth out of oil prices. WTI is trading electronically at about $38.00 today from a peak level of $42.45 last Wednesday. This is a significant break, but supply lines are tight and they present a tempting target for terrorists.
The break in the oil price has fueled a sharp +2.8% spike in the Nikkei Monday. Stocks in Japan were also helped by the strong U.S. employment report, as a secure U.S. recovery ensures demand for Japanese exports. The Nikkei spike generated demand for yen from overseas investors and saw the $/yen fall sharply. The Nikkei is up +7.2% this year compared to a 2.0% decline in the DJIA. Talk about a rate hike in China next month is mounting. The key item to watch is inflation with a rise of 5.0% y/y said to be the trigger, The May y/y figure is forecasted at 4.5% and then July is expected to arrive at +5.8%. Predictions are that the 5.3% borrowing rate could br hiked by 100 bps.
Tuesday sees a bank of Canada monetary policy decision. No change in rates is expected, but after the surge in the April and May employment statistics, a rate hike is becoming highly probable in the second half of this year. The Bank of England will announce its interest rate decision on Thursday a 25 bp rate hike to 4.50% is possible.
The only data from the U.S. today are April Consumer Credit figures. FRB Governor Gramlich speaks after the close.
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