Wednesday June 29, 2005 - 21:29:50 GMT
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Forex: No Curveballs Expected From The Fed
DailyFX Fundamentals 06-29-05
By Kathy Lien, Chief Strategist of www.dailyfx.com
· No Curveballs Expected From The Fed
· Euro Rallies On Leak of German Unemployment
· Pound Collapses On Weak Data
Gear up for a big day tomorrow! We are expecting personal spending, personal income, jobless claims, and Chicago PMI. The main event will of course be the Federal Reserve’s rate decision at 2:15 EDT. The two-day meeting that began today will give the Fed ample time to deliberate on if and how they should tweak the accompanying FOMC statement. They will probably spend no more time than it takes for each member to raise their hand in support of quarter point hike to agree that more tightening is still needed. Even though most data has been mixed, long-term yields remain low, which means that for the most part, the rate hikes that we have seen thus far has had a limited impact on the economy. Yet with oil prices skyrocketing, it remains questionable as to whether the economy will be slowing down itself. If oil prices do continue to move higher, don’t expect second quarter growth to be a repeat of the strong first quarter growth numbers that were reported this morning. GDP for Q1 was revised upward from 3.5% to a whopping 3.8%. The report however is not completely without flaws as it indicates that pricing pressures have eased. At this point, the balance of economic data makes the continuation of a measured pace of tightening well justified. In all likelihood, the Fed meeting will be a non-event with the Committee raising rates as expected and keeping most of the statement intact. The Chicago PMI will also be an interesting indicator to watch following the recent volatility in the Empire State and Philly Fed surveys. If the number comes in very poorly, the national ISM index faces the potential of slipping into contractionary territory below the 50 expansion / contraction line.
The Euro bolted higher today following the leak of German unemployment numbers. Interestingly enough, German unemployment is one of those rare releases that is almost always leaked and each time with pretty good accuracy. The market’s forecast was for unemployment to remain unchanged, but according to an “unidentified source” quoted by Reuters, unemployment actually fell 25,000 in May. This brings the unemployment rate down to 11.3% from 11.6%. Although Reuters added that the decline was not due to an economic revival, this release follows a series of other reports highlighting the gradual recovery in the Eurozone’s largest economy. The fall in the euro is certainly having positive effects on the economy. Meanwhile, there are a number of articles reporting on the EU Commission’s decision to give Italy 2 years to correct their deficit. If Italy fails to comply, there could sanctions, but at this point that seems unlikely because any penalty would have to be approved by all EU nations. Right now, Italy is only one of ten countries with excessive deficits. Both Italy and France are also in breach of the Stability and Growth Pact’s rules.
Pound bears had plenty to feed on with rather worrisome economic data plaguing the session today. The biggest headliner today was the sharp decline in the CBI industrial trends survey. The weakest number in 22 years has given pound traders sufficient reason to believe that the Bank of England will become increasingly dovish. However, the Monetary Policy Committee’s job will continue to be difficult with money supply and consumer credit increasing. This morning’s release indicates that money supply in fact vaulted higher by 11.6 percent, the strongest growth in over five years. Adding to the mix were increases in the net consumer credit figure for the month of May. Rising against previous period figures, consumer lending is an increasing concern as reflected in previous central bank’s minutes. Ultimately, earlier expectations of forthcoming interest rate cuts may be bucked if these factors persist.
The dollar continued to rise higher against the Japanese Yen despite today’s retracement in oil prices. Dollar / Yen as the new emerging carry trade of 2005 is really fueling the currency pair’s rally. With increasing interest rates in the US and an unchanged zero interest rate monetary policy in Japan, it has brain surgery to understand why USDJPY has become such an attractive carry trade. In the past, the rise was tempered by fears of Chinese revaluation. However the Chinese continues to stand staunchly behind their refusal to bow to international pressure, giving some USDJPY traders the guts to fade revaluation. Fundamentals continue to improve gradually in Japan. A perfect example of better times to come is the recently released news of completion of the Mitsubishi Tokyo Financial Group Inc. and UFJ Holdings Inc. merger, capping a period of 15 years in restructuring the broken Japanese banking infrastructure. Approved this morning by shareholder vote, the merger is viewed, in addition to previous transactions and the privatization of Resona Bank Ltd in 2003, as a necessary evil. Not only are nonperforming loans being disposed of through increased capital strength, these nascent relationships assist in creating a global competitor. After the merger, Mitsubishi Tokyo Financial can now hoist the title of the world’s largest bank, outstripping competitor Mizuho Financial and U.S. based Citigroup by assets. As a result, yen strength may soon enough be on the horizon if positive optimism can be sustained and similar suggestions of development can be created.
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