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DailyFX Fundamentals 07-27-05

DailyFX Fundamentals 07-27-05

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

· Mixed Messages Out of China Sends the Dollar Tumbling
· Euro Rallies as Data Continues to Improve
· Koizumi Threatens to Resign If Postal Bill is Rejected

US Dollar

Just like yesterday, the dollar has sold off against the Euro. Another round of stronger data out of the US failed to lend the dollar any support. Jobless claims increased a less than expected 5k, while more help wanted ads appeared in newspapers during the month of June than in May. At this point, the data sets up for another sizeable triple digit increase in non-farm payrolls next week. Today’s move though seems to be driven primarily by positive Eurozone data, oil prices rallying back above $60 a barrel, more mixed messages out of China as well as speculation that tomorrow’s GDP number could be bad. Although we have been seeing a lot of good data recently, a $40 billion inventory correction is expected to slow GDP growth from 3.8% in the past 2 quarters to 3.4% in the second quarter. Typically the GDP report is not as market moving as many of the other releases because the components of the report are known in advance. Tomorrow’s report however also comes with annual revisions to the last three year’s worth of data, which means that it can be far more market moving this time around. At this point, a break above 1.2250 would be needed before we can call a bottom in the EURUSD. The cards are continuing to be stack up in the EURUSD’s favor. The contradicting messages that China is sending out to the market only further confirms our belief there will be more appreciation in the Renminbi. It was only 2 days ago that China released a statement one of the government’s websites saying that just because they revalued the currency does not mean that there are more moves in the pipeline. Last night though PBOC Deputy Governor Wu Xiaoling said that the market is “an important basis” for setting the exchange rate. Traders took this to mean that China may be laying the groundwork for a Yuan float. Although the talk is pretty far fetched and would not be something that could come for many years down the line, it does give a reflection of the government’s bias, which is for the RMB to continue to rise. Ms. Wu said that it is important to listen to the market when setting the exchange rate and added that preparations are being made to launch FX derivatives. For the time being, all of the latest comments from China spells more potential downside for the dollar and upside for currencies such as the Euro and Japanese Yen. Yet we wouldn’t be surprised to see China come out once again tomorrow to “clarify” and temper the market’s addiction with analyzing their every word.

Euro

The Euro charged ahead once again thanks to stronger economic data. Even brash comments from Italian Prime Minister Berlusconi failed to stem the single currency’s rise. Berlusconi was quoted as saying that “the euro is a disaster” and that it is “a rip-off.” After multiple credit downgrades by rating agencies due to weak growth, the Italians are the least satisfied with being a part of the euro. Unlike the Germans and the French, they have yet to really enjoy the stimulative effects of the sell-off in the Euro. Germany on the hand delivered yet another strong labor market report. Unemployment fell by 42,000 in July, marking the fourth consecutive decline. The unemployment rate also fell from 11.7% to 11.6%. French and Italian producer prices both edged higher in the month of June reflecting still buoyant inflationary pressures in the region. For the time being, the FXCM Speculative Sentiment Index released this morning supports a further rebound in the EURUSD.

British Pound

The only piece of economic news coming out of the UK was the Nationwide house price data which was pretty much in line with estimates, showing a 0.2% monthly increase after a equal drop last month and a slower 2.6% yearly increase compared to 4.1% in June. This did little to stir the pound in the overnight hours. However, the pound ended up rallying close to 200 pips today, even going so far as to challenge the 1.7600 level before finding more comfortable ground around 1.7565. The UK has been getting pounded lately after the most recent release of BoE minutes giving rise to expectations for a rate cut during the next meeting. However, with the improvements seen in the past month in retail sales and GDP, there is now some hope floating around that this next cut would not lead into a string of cuts. Furthermore, the pound may have gleaned a bit of strength on the positive European data due to the strong trade ties between the two countries.

Japanese Yen

The overnight Japanese data slipped by rather quietly as traders chose to focus on political events instead. An initial loss in the yen’s value was experienced as Prime Minister Junichiro Koizumi basically posed an ultimatum to the parliament. His proposed bill to privatize the postal service is going to the upper house next week for a vote and he has threatened his own resignation if the bill is not approved. The rest of the day was much kinder to the yen as the USDJPY pair moved down towards the 112.00 level. Not only did the announcement from China lend support, but yen strength may be coming back on strong expectations for the Japanese economic future as well. Retail sales improved at a greater than expected annual pace of 3.1% in June due to the recent progress in wages and employment. Part of the reason that the yen barely reacted to the news is that the monthly change was actually worse than expected at 0.1%, much lower than the median estimate of 0.4%. The wage and corporate profit growth will also eventually feed into inflation and finally give the central bank their long awaited opportunity to lower the cash target, thereby raising interest rates.

 

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