Monday June 13, 2005 - 21:13:12 GMT
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Forex: Dollar Bulls Take Profit Ahead Of Inflation Data
DailyFX Fundamentals 06-13-05
By Kathy Lien, Chief Strategist of www.dailyfx.com
· Dollar Bulls Take Profit Ahead Of Inflation Data
· Europe Reaches Trade Agreement with China
· Yen Sells Off on Downward Revisions to Economic Data
US Dollar - Dollar bulls tried to take the euro lower to test the psychologically important 1.20 level, but failed remarkably. Not only did the dollar fail to extend its rally below 1.2025 but it actually reversed after the London close to break back above 1.21. The market itself was fairly quiet, which could explain some of profit taking under thin market conditions. The calendar was completely absent of any Eurozone or US economic data. The G8 meeting from this weekend was fairly uneventful with the group of finance ministers abstaining from comments on currencies or China’s exchange rate policy. They focused primarily on pushing Europe and Japan to work on structural reforms, for the US to become more fiscally disciplined and warned about the inherent risks of sustained higher oil prices. Speaking of prices, this week happens to be global inflation week. Tomorrow we are expecting the US producer price index followed by the consumer price index on Wednesday. On average, energy prices were lower in the month of May than in April, suggesting that some of the upward pressure that we saw back in April was not replicated last month. This is going to be pretty important since eventually the market will have to turn its attention back to US fundamentals and see that so far, US economic data has not justified the recent climb in the dollar. Instead, the US is finally experiencing a bit of what Europe has had to deal with for the past few years. That is, a strong currency crimping growth, not because of impressive strength in the Eurozone economy, but rather weakness in the US economy or the US dollar. The tables have now turned and the dollar is rallying because of political and structural problems across the Atlantic, and not because of economic fundamentals at home have been spectacular. The strength in the euro took a strong bite out of corporate profitability and there is a great blurb written by Morgan Stanley on Friday tackling the question of whether the strength in the dollar will hurt US corporate profitability. According to their survey of equity analysts, 55% believed that the dollar rally “would depress earnings somewhat” while 43% believed that it would have no impact at all. Asked whether FX hedging would offset some of that risk and they responded by saying that 46% of companies have not hedged their currency exposure, while 15% hedged their exposure using futures and 18% using options. This then leads to the question of whether most companies in the US cater solely to domestic demand - according to the analysts only 21% of companies have no FX exposure. Given this, hopefully US corporations will learn from the mistakes of European corporations and be able to deal better with exchange rate fluctuations if the dollar strengthens further.
Euro - Talk of a possible rate cut by the European Central Bank gave euro bears another reason to push the single currency lower this morning. Goldman Sachs continues to believe that the ECB will be cutting rates by 50bp. Comments from ECB Chief Economist Issing were misinterpreted once again. Issing was quoted as saying that the futures market’s pricing for a rate cut was probably correct. However Issing’s full comment was that the ECB is not guided by the market’s expectations, but since their policy is generally to limit surprises and prepare the markets for any possible moves, the financial markets “have almost always been right in assessing” the central bank’s decisions on monetary policy. The misinterpretation was short-lived though as prices reversed after the London close. Meanwhile, politics continue to be talk of the town in Europe. In contrast to the US, pushing up on the negotiation deadlines, the Europeans finally managed to come to a trade agreement with China. For weeks it seemed as if China was on the brink of a trade war with its two biggest export nations, but after the successful talks with Europe, there is more hope that the trade meetings that are taking place now with U.S. officials will follow suit.
British Pound - The British pound was pushing down towards the 1.80 mark today against the dollar, but made a sharp bounce back right after the close of the London session, tracking on the euro’s heels. This morning’s downward drive seems to have gained some steam from the UK’s disappointing producer price report which showed that outgoing prices actually declined by 0.2%, compared to expectations for a comparable increase. At the same time raw material costs rose unexpectedly by 0.3%, which spells trouble for manufacturers as their profit margins get squeezed further. On a broader scale, this report adds a tick to the side for more accommodative policy from the Bank of England. Another release that points in this direction was today’s ODPM house prices, which reflected the slowest growth since 2001. On a year-on-year basis, the measure nearly halved as it dropped to 6.9% from 12.6% in March.
Japanese Yen - The dollar catapulted to the highest level in seven months against the Japanese yen following downward revisions to both first quarter GDP and industrial production. Even though first quarter GDP was revised down to 1.2% from 1.3%, there was also an upward revision to the deflator from –1.2% to –1.0%. Exports were weaker than initially forecasted, but investment continues to climb, boosting capital spending numbers. The same sort of mixed undertones were also seen in the industrial production report. Japanese industrial production came in lower following a reduction in output growth but by the same token, shipments were revised higher from 1.8% to 2.7%. The contrasting details of the report will refrain the Bank of Japan from making any notable changes to monetary policy this week. Following the upcoming monetary policy meeting, the central bank is slated to publish its latest economic outlook.
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