Thursday June 10, 2004 - 12:14:39 GMT
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GVI Forex Strategy Session for the dollar-- NY Open
It looks as though the markets would like to try to buy dollars again and that they are getting plenty of support on the interest rate side for that trade from the Fed at the present time following Fed Chairman Greenspan comments on Tuesday. We have reached a point in time where expectations in short term credit market have become policy, so those forex traders who do not follow developments in the key futures markets for interest rates in key currencies are behind the curve. With the huge derivative markets and Fed transparency, interest rate expectations these days are reality. In other words, short-term rates have ALREADY moved for ALL borrowers and lenders. The markets instantaneously addjust rates for the Fed and key central banks and the futures prices are immediately and perfectly arbitraged into the cost of money. The Fed is becoming cognizant of the fact that the Fed funds rate is no longer the leading indicator of policy. Policy has become market expectations. If they hike interest rates on June 30, they will only ratify the money market tightening that had already taken place over a month ago.
Increasingly, official Fed monetary policy decisions have become only a formality as the markets for the large part efficiently anticipate their moves. In the U.S. the key instruments are Fed Funds and Eurodollar Futures. Thus the ACTUAL cost of money for the end of this year reflects an overnight cost of funds in the U.S. of about 2.50%. For the Euro it is about 2.25%, for the U.K. 5.25% and Japan 0%. This compares to 1.0%, 2.0%, 4.50% and 0%, respectively at the present time.
The Bank of England 25bp rate hike a short while ago had been broadly anticipated for a good while and a number of additional hikes are already priced into the pipeline. The specific timing of today’s move, however, had not been precisely anticipated by the marketplace until this week. Some key continental centers are closed today for the feast of Corpus Christi. Many are anticipating a SNB rate hike of 25bps next week. Note that three month euroswiss rates (SNB targets 3mo euroswiss), has moved to 0.46% in anticipation of the move, Its existing target is 0.25%.
In Japan, April Machinery Orders advanced 11.8% their greatest increase in six months. These data provide additional confirmation that the economy continues to advance strongly. Export orders were robust. Analysts say the report ensures that 2Q04 GDP will be another strong figure. We have been watching the benchmark 10-year JGB yield as the best barometer of sentiment in the economy and its yield has risen again on Thursday to 1.76%. Bank of Japan policy remains on hold, but if growth continues to accelerate, some rustling at the Bank of Japan would not start to surprise us, the Nikkei advanced by another +1.1% to close at 11,575.
The Reserve Bank of New Zealand raised its cash rate by 25bp to 5.75%. This could have a positive psychological impact on the Aussie$. The number of employed fell by 41,000 in May. This was a much larger than expected fall and reflected a give back from some recent outsized gains. The unemployment rate fell to a 23-year low of 5.5%.
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