Friday August 19, 2005 - 21:31:26 GMT
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Forex: Dollar Expected to Remain Rangebound Next Week
DailyFX Forex Market Report 08-19-05
By Kathy Lien, Chief Strategist
· Dollar Expected to Remain Rangebound Next Week
· Eurozone Trade Surplus Surges
· Oil Prices on the Rise Once Again
There was a lot of whipsaw price action in the dollar today despite the lack of US economic releases. This has been a great week for the dollar, with the currency recouping most of last week’s losses. However, the sell-off has remained limited and we can see just from today’s fluctuations that everytime the dollar tried to gain strength against the euro towards 1.2125, bears came out in force, bidding the currency pair back up above 1.2150. Even though the dollar rallied this week, fundamentals have not changed, which keeps us convinced that traders will treat this more as a buy on dips opportunity instead of a failure to extend the earlier rally. Oil prices are above $65 a barrel once again while the real estate market still faces the possibility of a massive slowdown if oil prices remain at current levels, or worse, keep on trending higher. Even Walmart today blamed their weaker profits on the rising price of oil. In terms of the housing market, real estate agents are already reporting that inventories are staying on the markets for much longer, which may be a sign of worse times to come. Steven Biddell of Bank of Montreal put out a great chart of investor sentiment a while back that lists the stages of investor psychosis. First comes the excitement, thrill and euphoria, which is then followed by anxiety, denial, fear, panic and eventually capitulation and despondency. Right now the housing market is probably in anxiety mode where the average investor thinks that this is a temporary setback and that he or she is in it for the long haul so they should not change their belief. Meanwhile, durable goods is the only notable release on the calendar which means that we are not expecting any significant market moving events next week. Therefore range-trading should persist in the dollar against the majors and for the EURUSD to trade within in 1.2100-1.2300 range for most of next week.
The Euro sold off for the sixth consecutive trading session despite more encouraging economic data. As we have talked about in our morning report, the trade balance surged from 2.7 billion Euros to 6.5 billion Euros, which is the strongest monthly trade surplus since last July. French second quarter GDP also was confirmed at 0.1% q/q. Although this is a pretty pathetic number, it is still positive growth. Next week, we have a lot of German data scheduled for release including second quarter GDP, the ZEW survey and the IFO business climate survey. With the Euro retracing this past week, the Eurozone should still be benefiting from the stimulus, and that should help to offset some of the pressures that rising oil prices are exerting on the world economy. For the most part, sentiment as measured by the ZEW and IFO surveys should improve as expectations for the region’s health also increases.
What a week it was! With no economic data for Friday, the British pound gained slightly, bouncing off of session lows as momentum from yesterday’s retail sales data and optimistic sentiment from recent reports offered much in favor of the Queen’s currency. Subsequently, previous notions of further rate cuts have been hampered by recent suggestions that earlier pessimism surrounding the economy may have been a tad overdrawn. Taking a step back, retail sales declined less than expected as most economists were factoring in the effects of the July bombings. Additionally, housing price declines look to have stalled as inflationary pressures remain a key concern as they hover the central bank’s benchmark target. Coupled together and you once again have strengthening interest in the cable. Notably against the euro, where the pound sterling has gained for the 11th straight session. As a result, traders will be anticipating further optimistic suggestions that interest rate cuts will remain unnecessary going into yearend, i.e. better than expected gross domestic product figures. Futures traders seem to agree with the notion as short sterling futures are bidding an implied rate of 4.43%, indicative of a stay on current rates of 4.50%.
No economic data as traders contained the underlying spot to a 45 pip range for the duration of Friday’s session in light of oil’s resurgence. Falling almost $3 a barrel on Wednesday, the front month contract rose again on the session, revitalizing concerns of higher energy costs, lower profit margins and adversely affected exporters. What’s surprising is the fact that Japanese denominated assets, for the most part, casted aside the notion of the ill effects of higher energy costs. However, now that it seems evident that oil prices may remain above $60, traders and investors alike have returned to basic fundamentals, potentially placing selling pressure on the domestic currency in the near term. One notable reaction has been the benchmark equity markets. Initially brushing aside the notion of rising energy costs, equities have now declined 1.8 percent for the week, the most in three months after closing at a four year high on Tuesday. Investors wary of costly energy are now contemplating the effects to corporate bottom lines and ultimately overall growth. With that said, market participants will be looking for continued strength in Monday’s consumer confidence figure in order to bolster the notion of domestic consumption underpinning future economic expansion.
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