Thursday June 9, 2005 - 21:43:30 GMT
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Forex: Dollar See-Saws With Greenspan Comments
DailyFX Fundamentals 06-09-05
By Kathy Lien, Chief Strategist of www.dailyfx.com
· Dollar See-Saws With Greenspan Comments
· Euro Speculative Positioning Flips
· Crude Oil Prices Soar, Adding Risk To Global Outlook
The dollar held its breath before the much-anticipated comments by Alan Greenspan, hoping for some direction from the Fed Chairman. However once the text of Greenspan’s speech started coming across the wire, the dollar began seesawing, first rallying on the relief that Greenspan remained steadfast on his view that the economy is on a firm footing, inflation is well-contained and rates will continue to be raised at a measured pace, avoiding all baseball inning talks. Then all gains were given back when the market realized that the Chairman didn’t really say anything new and keeping us guessing about whether we will be done at 3.50%. The one thing that we do know for sure is that the next rate hike will not be our last. Greenspan promised that the Federal Reserve would continue to watch the trend of economic data and respond as needed. Tomorrow we are finally getting some meaningful pieces of economic data. The trade deficit for the month of April is expected to rise to -$58 billion after dipping in March. This leaves the deficit fairly close to the record trade gap of -$60 billion set in February. The upcoming release will be interesting to watch, but the market will be paying closer attention to next week’s data on foreign purchases of US securities. If you recall, purchases of US securities fell almost 50% between February and March, falling short of the same month’s funding needs for the trade deficit.
We are continually amazed by the razor sharp accuracy of the FXCM Speculative Sentiment report. Released this morning, the report indicated that speculative positioning flipped from shorts to longs over the past week. The data was for 5am EDT, which makes the flip a perfect contrarian indicator for today’s price action. We typically do not report on positioning till the next week, but as of 1pm EDT today, speculators flipped back to net shorts from net longs (ratio shifted from positive 1.24 to minus 1.15). This suggests that the EURUSD could rebound even further from current levels. USDCHF positioning also moved back to net longs (1.10) from net shorts –1.25, providing a further confirmation that we may be in store for a rally in the EURUSD and corresponding sell-off in USDCHF. Meanwhile, the ECB’s monthly report echoed recent comments made by President Trichet, which is that even though inflation remains well contained for the time being, the central bank will need to continue to be vigilant, especially since oil prices are back on the rise.
The British pound extended yesterday’s late session decline, breaking through both the 1.8300 and 1.8200 levels as traders increased their short positioning on lackluster economic data in the United Kingdom. Repeating last month’s disappointing output data, manufacturing and industrial production once again fell on an annualized basis. Falling 1.9 percent, industrial output dipped for the fourth consecutive month and added to the overall general decline. The last time the indicator bounced to the upside was in December of last year, climbing 0.2 percent higher. Declining in tandem, manufacturing figures also slipped, down 1.4 percent annually. Ultimately, the lower releases underpinned the Bank of England’s decision earlier in the session to keep the benchmark repurchase rate unchanged at the highest in 3.5 years, the best among G7 economies. The widely anticipated move was attributed to a visible slump in consumer demand and stagnation in the once booming housing market in addition to the aforementioned soft production figures. As a result, speculation continues to mount on the probability of a near term rate cut rather than any further increase considerations with Europe’s second largest economy temporarily halted. Separately, the visible trade deficit expanded considerably versus last month’s results, growing to 4.838 billion pounds.
Dollar yen rebounded for the second consecutive day despite better than expected consumer sentiment data. Rising for the second consecutive month, consumers’ confidence rose in May, lending to the notion that a pickup in domestic demand could subsequently follow. Expected to show 47.9, the release was higher than consensus rising to 48.2, slightly below the expansionary 50 figure. Ultimately, given the time lag in household spending data, the loftier demand is anticipated to surface sooner than later and could add to further yen strength. Additionally, rising machine tool orders were released in conjunction with the current account total. With global foreign demand waning, orders for machine tools rose a paltry 0.1 percent on an annualized basis. Although rather lackluster, the figure may be more reflective of a balancing as the report vaulted 18.2 percent in the previous period and not suggestive of a dramatic slowdown in demand. Additionally tepid, the current account surplus grew less than expected as higher oil prices limited foreign spending on Japanese exports. As a result, the account total grew to 1.579 trillion yen compared to 1.851 trillion in the month of March.
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