Friday August 12, 2005 - 21:35:10 GMT
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Forex: Weak TIC Data Could Push Euro Above 1.25
DailyFX Fundamentals 08-12-05
By Kathy Lien, Chief Strategist of www.fxcm.com
· Weak TIC Data Could Push Euro Above 1.25
· Wider Trade Balance Keeps Dollar Under Pressure
· Pound Rallies as BoE King Warn Not to Expect More Rate Cuts
Judging from the price action in the dollar today, we can see that traders were hoping for the trade balance number to come out bad enough to push the EURUSD above 1.25. Although the trade deficit did widen from -$55.4bln to -$58.8bln, there was not enough bearish momentum to break the psychologically importance resistance level. Once traders realized that this was indeed the case, we saw a lot of pre-weekend profit taking in the EURUSD, which pushed the currency back below 1.2400 to a low of 1.2381. Yet this profit taking was shortlived as other traders scooped in for the opportunity to buy on dips. As soon as the University of Michigan survey was released much weaker than expected an hour later, the EURUSD shot right back up to 1.2340. Consumer Confidence dipped down to 92.7 from 96.5. The market had only expected a modest retracement to 96.0. Consumers are finally feeling the pain dealt by the ongoing surges in oil prices, something that we have been warning about for some time. In fact, according to an AP-AOL poll conducted between August 9 -11, 64% of the people surveyed said that gas prices will cause money problems for them in the next six months, while 35 percent did not think so. In April, 51 percent expressed concerns about the cost of gas. With oil prices breaking above $67 a barrel and seeing the third consecutive day of new all-time highs, we believe that unless the trend reverses, the fall in confidence could certainly translate into a fall in consumption. On Monday, we are expecting the Treasury International Capital Flow report (TIC). Foreign capital inflow into the US is expected to grow in the month of June, but with a larger trade deficit and the possibility of China gearing up for the revaluation that they announced the following month, the number could come in much weaker than the market’s forecast. If the number comes in below $58billion, it could be the catalyst that the EURUSD has been waiting for to push it above 1.25.
The Euro remains well supported against the dollar today despite weaker French data. French GDP growth increased by a less than expected 0.1% in the second quarter while consumer prices fell by 0.2% in the month of July. Although we remain relatively upbeat about the Eurozone economic recovery, we are beginning to see some red flags that we want to warn our traders about. The resurgence in Eurozone growth was primarily a result of the sharp fall in the EURUSD since the beginning of the year. The decline in the currency has even buffered the country from the significant rise in oil prices. With each rebound in the Euro the stimulus begins to evaporate. If you tack on the continual increases in oil prices and the cloud that the Eurozone is gliding on could quickly vanish. The ECB though is less pessimistic. In their Monthly Bulletin, they upgraded the risks to growth from “risks to economic growth lie on the downside” to a more equal assessment of both upside and downside risks.
The British pound rallied modestly today as we got another mixed bag of news from the UK. The BRC retail sales index reported a 1.9% m/m decline in growth last month following a 0.5% rise in June. House prices as measured by the FT also declined by 0.3% m/m with growth revised to a contraction in the month of June. Meanwhile the much awaited Inflation report from the Bank of England confirmed the market’s belief that there may not be a follow-up to the recent rate cut. Although the central bank expects growth to be weak in the near-term, they expect GDP to rebound over the next 2 years. Inflation is expected to also move above their 2% target this year, which indicates that the BoE is bearish in the short-term and bullish in the long-term. The more important thing though is that BoE Governor King warned against expectations for another rate cut over the next few months.
Even though Japanese GDP growth came in weaker than expected in the first quarter, the Yen rose for the fourth consecutive day. GDP increased 0.3% compared to expectations for 0.5% growth, but this still marked the third straight quarter of growth. Final demand also remained resilient, which helped to keep the market bullish on the prospects for a continued upturn in the Japanese economy. The interesting thing is that the Yen is rising in the face of surging oil prices. As a significant net oil importer, the Japanese economy should be punished by the rise in oil. Instead, the market is of course distracted by the developments in China and as we have long postulated, revaluation announcements by China could have a profound positive impact on the Japanese yen. Not only has the Yuan increased in value, but China will probably have to accumulate more Japanese Yen for reserve purposes.
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