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Friday August 26, 2005 - 20:47:15 GMT
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Dollar Recoups Gains but Market Begins to Contemplate Greenspan Departure

DailyFX Fundamentals 08-26-05

By Kathy Lien, Chief Strategist of www.fxcm.com and www.dailyfx.com
strategist@dailyfx.com

· Dollar Recoups Gains but Market Begins to Contemplate Greenspan Departure
· Good UK Data Pares Back Market Expectations for Further Rate Cut
· Yen Gives Back Gains as Rumors of More Chinese Revaluation is Denied by PBoC

US Dollar - After sliding against the Euro in the early US trading session, the dollar managed to recuperate most of its losses as oil prices retraced on easing concerns for the potential damage of Hurricane Katrina. Even though the dollar rebounded, we doubt that the worse is over - September tends to be one of the most active Hurricane months. Additionally, we did not receive that much good news today with consumer confidence as measured by the University of Michigan sentiment survey took a nosedive to 89.1 verus 92.7 the previous month. Greenspan also had some warnings for us in his speech this morning. He said that the Fed was paying more attention to asset prices and that increases in asset prices can “readily disappear” if investors all of sudden became more cautious or risk averse. With the Chairman himself who has up until now remained relatively Pollyanish in the face of a potential burst in the housing market bubble chiming in about the dangers of a contraction in the housing market, it would be niave not to consider the potential risk that a burst or even just a slowdown would have on the US economy and the US dollar. Of course we hope for the sake of the many people who may be invested in US real estate that this does not happen, but it would be unwise not to prepare for it. Today’s speech by Greenspan has begun the season of the “hunt for Greenspan’s replacement.” Everyone is beginning to talk about Greenspan’s legacy. In today’s Financial Times, there is an article titled “Market Trauma Warning When Greenspan Goes.” The article talks about how Greenspan’s personalization of monetary policy had pretty much turned him into a “one-man show.” This suggests that once he’s out of the picture, it remains to be seen whether the next Fed Chairman and his team can hold their own in the markets. Greenspan is scheduled to leave office in the beginning of next year. We wrote an extensive article on Greenspan and his potential replacements back in June that can be found on www.dailyfx.com. Meanwhile we have a very busy week ahead of us. Just from the US alone, we are expecting non-farm payrolls, consumer confidence, Fed minutes, GDP, Chicago PMI and ISM.

Euro – With not much Eurozone economic data released this morning, the euro traded mostly off of US data and commodity prices. The one piece of news that was released was money supply growth, which came in higher than expected and in fact rose by the strongest rate since October 2003. Higher money supply is inflationary, so the report gives the ECB a better reason to keep rates unchanged. There are some economists who are calling for a possible rate hike due to growing inflationary pressures, but we doubt that is likely since growth is improving, but on a relative basis, still benign. Like the US, there are a lot of data expected out of the Eurozone next week, namely GDP, labor market and consumer spending reports. Therefore even though next week is Labor Day weekend in the US, there may still be a good deal of interesting price action ahead.

British Pound - Rocketing higher earlier on, the pound strength was sparked by further interest rate speculation today. Even with relatively positive economic data released during the session, it seems that the big focus of the market has now shifted to further interest rate cut decisions by Bank of England members and not basic economic fundamentals. As a result, with both gross domestic product and export figures vastly improved, market participants are now starting to believe in the beginning of the end to interest rate cut considerations. Falling in line with consensus estimates, overall output figures for the U.K. rose 0.5 percent in the monthly comparison while additionally rising slightly higher than previous estimations in the annualized figure. Garnering the most attention, however, were the export figures. In the second quarter, exports vaulted higher by 5.6 percent, dominating consensus 1.9 percent expectations. With global demand seemingly increasing, in light of rising imports by 3 percent, improvement in the recently lackluster economy looks to be on the horizon. As a result, coupled with rising inflationary concerns, policy makers may grow reluctant in considering any further rate reductions as monetary policy still remains hawkishly biased. However, with consumer consumption and housing valuations still in a lull, an otherwise logical decision may have become only that much harder.

Japanese Yen - The Japanese yen rallied earlier on in the session before giving back gains ahead of the weekend. Traders squared positions in the currency pair as two major releases and further Yuan speculation dominated morning market activity. Tokyo and National consumer prices indexes were released much to the chagrin of market participants, expecting the economy to be exiting deflationary conditions. Falling in the month of August, Tokyo consumer prices actually dipped 0.3 percent while the subsequent national report indicated prices rising in line with expectations. As a result, overall sentiment remains that the world’s second largest economy remains in deflation, even as productivity and growth seem to be improving. This may be somewhat surprising as oil prices have risen 54 percent from a year ago, adding to producers’ overall costs. Nonetheless, the Japanese economy remains resilient in the face of higher commodities with officials calling for inflation to return some time in 2006. Additionally heard throughout the day were rumors of further revaluation efforts by Chinese policy makers. Expected to increase by an additional 1 percent by the end of business today, the move would have been the second occurrence in two months. However, officials from the People’s Bank of China quickly quelled the rumors, maintaining their stance on future revaluation and their conservative methodology.

 

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