Wednesday April 28, 2004 - 22:17:22 GMT
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Dollar Rallies Ahead Of GDP Report
DailyFX Forex Report 04-28-04
· Dollar Rallies Ahead Of GDP Report
· Swiss KoF Leading Indicator Increases In April
· BoJ Increases Growth Forecasts, Leaves Rates Unchanged
· USDCAD Rallies As Nortel Fires CEO
The euro sold off on broad based dollar gains ahead of tomorrow’s advance estimates for first quarter US GDP. As we have previously mentioned, US economic data has been strong, particularly consumer spending, which accounts for over 65% of GDP. The market is currently expecting another above trend quarter, with consensus at 5%. If growth in the first quarter starts off strongly, it could set a positive tone for the dollar ahead of next Friday’s non-farm payrolls release. If the number is released in line, there will likely be a muted effect on the dollar, since the GDP estimate is predicted using monthly economic data that have already been released, such as personal consumption, durable goods shipments, construction spending, international trade, and inventories. Aside from the headline number, the market will also be paying attention to the GDP deflator, which is a measure of inflation. Tomorrow, from the Eurozone, we are expecting M3 money supply and French business confidence. Both are expected to remain fairly stable. ECB Trichet will also be speaking at a forum on enlargement, which will make for interesting reading since 10 new countries will be joining the European Union on May 1st.
The Swiss KoF leading indicator increased from an upwardly revised 0.55 to 0.56 in the month of April. Although the pace of growth was below expectations, the latest release continues to highlight the underlying improvements in Switzerland’s economy. A higher number was pretty much expected given the surge in PMI during the month of April. Today’s report from Switzerland marks the eleventh consecutive month of improvements, confirming that economic growth in the country is accelerating. The global recovery is helping to boost exports as Swiss corporations report a broad based increase in demand. The KoF expects further acceleration in growth and an unchanged growth rate in the third quarter. Euro Swiss interest rate futures are currently pricing in a rate hike in the third or fourth quarter of this year. However, the market’s expectation for a monetary policy move by the SNB may be too aggressive. Like the Fed, the SNB appears to be slowly preparing the market for an eventual increase in rates. The country is only beginning to recover from a 10-year period of stagnation and even according to SNB Hildebrand, there is “still significant under-utilization of capacities.” Although the comments are hawkish, they are not particularly proactive, which supports our view that the market’s expectations may be too aggressive.
The British pound sold off significantly today on the back of broad dollar weakness and news that London’s Heathrow Airport was evacuated momentarily because of a suspicious package that was later discovered to be harmless. The pound appears to be particularly sensitive to dollar developments, which is not surprising since the UK economic calendar is fairly light this week. Tomorrow we are expecting the EU/GfK consumer confidence survey, which is expected to remain unchanged. Despite the improving economy, confidence has been weak following two rate hikes and the bombings in Madrid. The possibility of another rate hike should keep confidence subdued, but confidence has been a poor indicator of consumer spending habits. In his speech in London today, Chancellor Brown suggested that the Monetary Policy Committee should act to prevent inflation from getting out of control, which is essentially giving the MPC his green light of approval for more rate hikes.
USDJPY is currently flirting with the 110 level as Japanese investors adjust their positions ahead of the Golden Week holidays, which begin tomorrow. Price action in USDJPY continues to contrast with Japan’s underlying fundamentals. Although the Bank of Japan left interest rates unchanged today, they upgraded their GDP growth forecasts for the 2004 fiscal year from 2.5% to 3.1%. Industrial production was weaker than expected, indicating that domestic demand continues to lag export gains. Interestingly enough, the Cabine estimates the breakeven exchange rate for exporters is now at 105.90, down from 111.40 last year.
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