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Tuesday July 26, 2005 - 21:27:17 GMT
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Forex: Dollar Rebounds As China Tries To Manage Speculation

DailyFX Fundamentals 07-26-05

By Kathy Lien, Chief Strategist of www.dailyfx.com

· Dollar Rebounds As China Tries To Manage Speculation
· Euro Writes Off Another Piece of Good Data
· Pound Continues To Slide On Weak Data

US Dollar

The US dollar rallied once again thanks to new attempts by China to downplay their latest currency move. In order to prevent speculation from getting out of hand, the Chinese central bank came out with a statement on its website to clarify recent press coverage pertaining to the comments made by Central Bank Governor Zhou who said a few a days ago that the move by China was an "initial 2% adjustment” and that they will gradually continue to reform the country’s exchange rate system. Today, the People’s Bank of China released a statement that said even though Zhou used the word “initial”, it is wrong to think that “an initial move (which) warrants further actions in the future.” To them, “gradualism” is key and it appears that China may be trying to convince the markets that gradualism means that changes will be done over the course of months or even years. The market has become so conditioned to analyzing each word that is used or not used by the central banks around the world that Zhou’s comments had the press talking about more moves by China in the near term. The market may have to get use to the fact that the Chinese may not be as careful as Greenspan and the Federal Reserve have been when it comes to their choice of words and they reserve the right to retract them, like they have done in the past. Yet once again, we caution against completely writing off future moves by China. The Chinese have a history of surprising us by moving faster than expected. Their latest statement may be nothing more than an attempt to manage expectations and speculation. The only piece of economic data released today was the Conference Board‘s consumer confidence report which fell from 106.2 to 103.2 in July. Both the present conditions component and the expectations component fell, which could be partially attributed to the recent attacks in London as well as the spike in oil prices.

Euro

Even a stronger than expected IFO report and higher inflationary pressures as measured by the CPI failed to lift the euro. For the most part the market has once again become immune to Eurozone data. The focus on the diverging interest rate cycle between the US and Europe remains the dollar’s primary catalyst. Yet the longer and deeper the EURUSD slide, the more stimulative it would be if the Eurozone economy, especially since oil prices appear to be stabilizing. For weeks now we have talked about the gradual recovery in the Eurozone. The stronger IFO index and the better than expected ZEW survey released last week certainly has some calling for the possibility of an economic recovery in Germany. We will have to see if consumer confidence also rebounded in tomorrow’s data as well as whether France has finally been able to also enjoy some of the stimulative benefits that Germany has been basking in.

British Pound

Further calls for an expansionary monetary policy implementation could be heard throughout Europe’s second largest economy today. Released earlier on in the session, the masses witnessed yet another piece of downtrodden evidence that reflected the current sluggishness the region is experiencing. According to the Confederation of British Industry’s quarterly survey, 31 percent of factories saw orders decline compared to a 24 percent witnessing an increase in the past three months. Although the balance figure of -7 percent is a considerable improvement against the -18 percent seen in last quarter’s report, 33 percent of respondents confirmed near term fears of future prospects while only 17 percent remained confident. Given all the dreary figures, there was one sign of optimism as it was reported that foreign global orders increased in the quarter, the first time in almost 15 months. Given this figure and the fact that confidence has been increasing all across the board in major industrialized economies, one might assume that the sector is bound for a pickup. The idea is that increasing orders abroad may ultimately feed into and underpin strength in the sector, curtailing earlier notions of a repurchase rate cut. However, this would be unlikely as central bankers remain bent on consumer spending as a major factor in their final decision, as domestic orders remain low. Ultimately, any pick up in manufacturing may not prevent the cut from occurring. However, it may restrain the speed to which they are implemented.

Japanese Yen

Another session, another day full of Yuan drama. Continuing its previous retracement, further long positions seemed to be pared back in the Japanese yen as statements released by Chinese officials led many a market participant to consider the reality that no further efforts may be forthcoming. Earlier in the session, China’s central bank stated it would not consider any further revaluations in the “foreseeable future.” Commenting on the situation was Japanese Finance Minister Sadakazu Tanigaki at a regular press conference today in Tokyo. Tanigaki stated that “it was too early to evaluate China’s actions” and that continued efforts by policy officials would have to be made to “closely watch how China manages the currency.” With an appreciated currency, many experts are now weighing the fact that China will now have to consider the possibility of a deficit rather than a surplus in light of commodity prices becoming cheaper to purchase. Ultimately, higher demand may place pressure on prices on a global framework. Separately, market participants are gearing up for a round of high profile data for the economy. Retail trade, household spending and industrial production are among the reports with traders also considering consumer prices. With no given consensus at this time, sentiment is dictating that the figures could be released to the upside given the dreary results of late.

 

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