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Forex: Hat Tip To China

DailyFX Fundamentals 06-23-05

By Kathy Lien, Chief Strategist of www.dailyfx

· Dollar Slides As Boeing Orders Distort Durable Goods
· Hat Tip To China
· Next Week’s Big Event Will Be The FOMC Meeting

US Dollar

Dollar bulls can finally pat themselves on the back because they did it! They managed to drum up enough momentum to break the 1.20 level in the EURUSD even if it was only for a blink of an eye. Unfortunately we may not be out of woods completely since the move occurred in the quietest time possible during the Tokyo trading session. London and New York traders may still want in on the action, which makes the EURUSD vulnerable for a retest of 1.20. The highlight of the day was the strong durable goods orders report. However, even though orders for durable goods increased 5.5% against expectations for 1.0% growth, excluding transportations, orders actually fell by 0.2%. The rise came solely from Boeing’s 200 new aircraft orders, which are up from 14 the previous month. This indicates that if it weren’t for Boeing, these would be pretty bad numbers. Meanwhile looking at the housing market new home sales were also softer than expected, echoing the slight slowdown that we saw in yesterday’s existing home sales report. Next week should be an exciting week since we have a very busy global economic calendar. The biggest events to watch will be the Fed’s rate decision, ISM and what Prime Minister Tony Blair plans to do when his government assumes the EU Presidency on July 1st. Oil prices continue to remain at very high levels, causing triple digit losses in the stock market for 2 consecutive trading sessions. The high level of oil prices is not only a strain that will be felt by just US consumers. Instead it will be a strain on the pocketbooks of consumers globally.

Japanese Yen

We upped the order of our Japanese yen commentary because we really want our readers to catch this fascinating point that was made by Brad Sester of Roubini Global. He said that instead of continuing to accumulate US treasuries or selling the massive amount of reserves China is using that money to buy up US companies and increase their international exposure. Sester argues that, "The more energy companies -- or appliance makers -- that China buys, the smaller the increase in its reserves." DailyFX is tipping our hats to the Chinese because this is an incredibly intelligent idea. If they sell US treasuries (for revaluation), they risk sending bond yields soaring and hence jeopardizing the US economy. This could be disastrous for China since the majority of their exports are destined for the US. So instead, they are using their dollars to buy up US companies, which not only benefits China but also the US stock market. By making a bid for a US oil company, China accomplishes two objectives - 1) find a way to use their massive treasure chest of dollars 2) meet their own growing need for commodities and raw materials such as oil. Sester adds a third possible accomplishment, which is that oil fields will probably end up yielding higher returns than US treasuries. So the big question now is whether the US government will allow a state-owned Chinese firm to control a small part of the US domestic oil industry. Anti-Chinese sentiment in Congress and other political issues will play a large role on whether the US government will agree to let themselves become more economically dependent on a country with whom they are already extremely critical of politically. If you remember in the 1980s, when Japan went on a buying binge during their economic boom, it was also a very sensitive issue and particularly concerning to the US. So instead, what China is doing this time around is to recruit the help of US private equity firms to aid them in making the bids and advise them through any political challenges that the US government proposes.

Euro

The Euro remains under pressure and will probably continue to do so for the first half of next week as the major events with market moving potential are not released until Thursday. Most pieces of data are expected to show a slight bit of improvement similar to what we have been seeing this past week. However in all likelihood, the market will probably shrug off the data as the euro suffers from pessimism related to the EU Constitution and the market’s cautiousness ahead of the FOMC meeting. The futures market has completely priced in a quarter point rate hike, so the uncertainty will lie once again in the statement. The weakness in recent data could force the Fed to a bit more downbeat on growth, but soaring energy prices will keep them somewhat vigilant. As for the ECB, Trichet was on the wires once again today saying that rates are very low and inflation is well contained, confirming the central bank’s solid neutral stance.

British Pound

The British pound recouped some of its recent losses with no new developments out of the UK. The central bank’s recent shift to a slightly dovish monetary policy will keep pressure on the pound in the week ahead. The market will continue to assess incoming data to see how it would impact the BoE’s future rate decisions. As we have seen over the past few months, the BoE is a pretty dynamic central bank, so if data does indeed improve, the 2 dissenting members voting in favor of a rate cut could shift their stance. So far, even though the central bank is slightly dovish, their policy is still much closer to neutral.

 

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