Tuesday June 28, 2005 - 21:22:40 GMT
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Forex: Crude Slides, Dollar Rallies
DailyFX Fundamentals 06-28-05
By Kathy Lien, Chief Strategist of www.dailyfx.com
· Crude Slides, Dollar Rallies
· Euro Weakens As Another Country Gets Downgraded
· Yen Drops to 8 Month Low
The retracement in oil prices today along with stronger consumer confidence numbers has helped the dollar gain back some of its traction against the euro. The EURUSD has trended lower throughout the Asian, European and US trading sessions, seemingly adamant about taking another stab at the 1.20 level. Tomorrow’s GDP data, though generally not as market moving as some of the other releases could very well aid dollar bulls in their attempt to push the pair below the staunch line of defense at 1.20. Tomorrow we also begin the two day FOMC meeting, leaving the market openly questioning whether the Fed will provide us with any new information on one of the most important topics on the mind of most traders today, which is when will the Fed pull the plug on rate hikes. The surge in oil prices that we have been seeing over the past few weeks should prompt the Fed to remain vigilant so that prices do not spiral out of control. Speeches from a few Fed officials last week confirm this belief. However, what eventually happens is that oil prices end up being such a drag on growth that the Fed finds themselves in need of moving to neutral or even more accommodative monetary policy to pull the economy out of its slump and tempt consumers to spend once again. For the most part, data that we have seen over the past month has surprised to the downside, suggesting that the Fed may want to wait to see how energy prices proceed before making a big shifts in policy.
The euro is weaker today following a bout of mixed to mostly disappointing data from the region. Consumers for the most part are becoming increasingly pessimistic and we don’t blame them. Even though Blair is scheduled to take over the EU Presidency on July 1st, there have not been any new developments that would give consumers hope about the future of the euro. German consumer confidence as measured by GfK plunged from 4.3 to 3.5. Consumer confidence in Italy also edged lower for the fifth consecutive month. Businesses on the other hand are feeling the opposite. Business confidence in France actually improved in the month of June. This is certainly related to the sharp slide in the Euro that we have seen over the past 2 months. As we talked about yesterday, the slide in the Euro is very beneficial for GDP growth and has helped to offset most of the rise in oil. Meanwhile, Standard and Poor’s downgraded the credit rating of Portugal from AA to AA-. Although Portugal is a comparatively small country, this follows downgrades that have been already issued to Italy and Greece. Collectively, these downgrades may cause some investors to rethink their investments in the Eurozone, which in other words means the euro. The downgrades also illustrate the difficulty that these countries will face if the Euro ever breaks up. Right now, the fact that they are connected to higher rated countries like Germany and France (who are AAA rate) keeps their costs of servicing debt lower. If they leave the Eurozone on the other hand, the cost of servicing their debt could skyrocket.
A non-existent economic data environment led traders to take profits on two days of gains as economists mulled over yesterday’s housing price analysis. With data pointing to a continuing fall in the last 12 months, experts remain confident that valuations will continue at current levels with strong sales, up 3.5 percent, as Bank of England rate cut considerations mount. Here, some speculate that sales may again increase once reductions filter into the economy as the cost of money declines. On a political front, attention is turning to the upcoming G8 Summit. Considering rising tension over budgetary rebates and farm subsidies, French President Jacques Chirac backed Prime Minister Tony Blair in his plans to bring climate change ideas to the table. One of the first positive suggestions since the budgetary summit debacle, the stated support to confront global warming issues may hint that tensions were slightly overstated and lend optimism, albeit incremental, to a potentially oversold regional currency. Separately, tomorrow looks to bode better with money supply figures, consumer credit and mortgage approvals for traders to pounce upon. Consumer credit may be the highlighted figure as policy officials stated earlier that individual lending remained a considerable concern to further repurchase rate decisions.
Caution reigned supreme during the session as traders continued to bid the Japanese yen lower throughout the day to an eight month low, as they remain fearful of rising oil prices. Casting aside relatively optimistic retail trade data, market participants remained wary as crude contracts flirted with the $61 per barrel resistance. Oil prices have already climbed over 61 percent on an annual comparison as supply constraints have led many to believe that demand may remain exponentially high. As a result, most economists tossed aside the brighter 2.7 percent increase in retail trade data as dips are expected in the near term future on pricing lags. Additionally, with the economy importing close to 98 percent of their oil reserves, higher oil prices mean squeezed corporate bottom lines, rising consumer costs, and a depleted trade balance. Subsequently, the climbs have resulted in policy makers’ keeping a watchful eye. Today, Japanese Finance Minister Sadakazu Tanigaki stated that officials will be “carefully” monitoring the price and that both consumers and producers should begin to consider dealing with higher costs.
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