Tuesday June 15, 2004 - 14:08:54 GMT
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GVI Forex Strategy Session for the dollar-- NY Open
The focus of trade today is the May U.S. CPI report on the open and how that data might color the testimony of FRB Governor Greenspan at 15:00 GMT. There is no doubt in the mind of traders and in the money markets that the Fed will be raising rates by at least 25bps on June 30. Greenspan and a number of Fed officials have made this abundantly clear. The key issue in play is whether they hike by 50bps and many feel that the May core CPI report today could play a decisive role in that decision. An increase above 0.2% in the month is thought to be the dividing line. The recent improvement in the dollar tone has been premised on the expectation of a significant tightening of U.S. policy over the course of this year. The cost of money already reflects a Funds tightening of 150bps by yearend from present levels. In his nomination testimony today, Greenspan will have an opportunity to send a signal to the markets if they are on the right path.
Monetary policy is the key Issue in the U.K. today as well. The May CPI was up 1.5% from a year ago, the highest since April 2003. This compares with 1.2% in April. Bank of England Governor King has predicted inflation will push past the 2% target within two years. Last night, King said higher house prices pose a risk to the economy because after the hectic pace of price rises over the past year, it is clear that the chances of falls in house prices are greater than they were. The markets expect a gradual and steady rise in U.K. rates this year. Some say the repo rate will top at 4.75% (4.50% now), while others see a rise to 5.50%. We expect to see a move to above 5%. This interest rate spread should be supportive of cable versus the euro.
There were no surprises from the Bank of Japan today as the central bank kept policy unchanged as expected. In its economic assessment the bank noted that the economy is gathering stronger momentum as rising corporate profits boost job creation. Also as expected BOJ Governor Fukui tried to reassure the JGB markets, where prices have been tumbling on the past few weeks. He said that the bank would keep interest rates close to zero to support the recovery. He also indicated that the recent fall in JGB prices had been a bit sharp. The yield on the benchmark 10-year JGB fell Tuesday to 1.80% from 1.85% following his remarks. The Nikkei eased by 103 points to 11,388 despite the optimism from the central bank. Traders are aware that the BOJ must be in the process of formulating an exit strategy for its zero interest rate policy.
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