Wednesday April 28, 2004 - 11:37:39 GMT
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GVI-- Morning Forex Strategy Session
Forex markets seem to lack a strong focus at the present time and thus choppy trade has ensued while the markets lurch from headline to headline. U.S. action against Fallujah, Iraq and the Damascus bombings roiled the late Tuesday markets in NYC, but these events have already faded from view. All the markets have to look forward to for the balance of the week is the 1Q04 GDP figure on Thursday. A rise on the order of 5.0% is already priced into the dollar, so we suppose there is some room in the report for a disappointment. GDP figures are always hard to trade on anyway because of the distortions that the inventory figures can create.
The BOJ met today before Japan embarks on the Golden Week holidays that start on Thursday and extend through the first three days of next week. The bank kept its ultra-easy monetary policy intact as widely expected. The bank also issued its semiannual GDP and CPI forecasts for FY2004. It predicted GDP growth of 3-3.2% and core CPI of -0.2%. The deflationary CPI forecast ensures that monetary policy will be left unchanged for the rest of the current fiscal year, as BOJ chief Fukui has promised that rates will not be raised until inflation turns positive. Position-squaring in the yen has seen $/yen trade lower.
BOE MPC committee member Marian Bell, a dove, further solidified expectations for a BOE rate hike next week when she indicated that rates will have to be raised. The current thinking in the City seems to be that rates are headed up “a quarter a quarter” this year until monetary neutrality is achieved. There is some debate on what constitutes neutrality, but there is agreement that it is at least 50bp’s higher from here. This view should be a sterling positive over the next few quarters.
In Europe, ECB V.P. Papademos stated that rates in the Eurozone are currently low enough to support an economic recovery. The FT reported Tuesday that in the ECB governing council of 18 members, 8 have recently offered the view that Eurozone interest rates are at least neutral or appropriate and three others have said the Eurozone will experience a gradual recovery. Thus more than half the members seem to be happy with leaving rates where they are. The ECB is not about to ease policy this year. It’s not clear if this is positive or negative for the euro. We feel it is neutral at best.
Australian 1Q04 CPI was at the high end of market expectations as it rose +0.9% in the quarter but it was up only +2.0% yr/yr. That is the lower end of the Reserve Bank’s 2-3% target range. Inflation is not a concern in Australia and the economy remains well underpinned. The outlook for the Aussie$ should be constructive over time, once the current position adjustment phase has run its course.
The weekly energy survey results at 14:30 GMT are always worthy of scrutiny with global energy stocks still in short supply. Otherwise this is a slow day on the scheduled news and data front.
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