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Friday September 30, 2005 - 20:39:06 GMT
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Forex: Mixed Eurozone Data Leaves Euro Unchanged

DailyFX Forex Fundamentals 09-30-05

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

· Stronger Data Fails to Clarify the Uncertainty Around the Dollar
· Mixed Eurozone Data Leaves Euro Unchanged
· Increased Consumer Spending in Japan Boosts Yen

US Dollar
There was more whipsaw price action in the dollar today, but no new direction. The dollar continues to remain trapped in a tight range as the mixed data released this morning clouds the air with uncertainty. Both US personal income and spending took a dive in the month of August with spending falling by the largest amount since November 2001. The US consumer is literally hanging by a shoestring with income falling and savings eroding. Even though the savings rate improved from –1.1% to –0.7%, it is still negative and only rebounding from the lowest savings rate that we have seen since 1959. With energy prices increasing, it seems that the US consumer has no buffer remaining. There have already been reports of increased credit card delinquency rates, with excessive gasoline charges contributing to the weakness. This has kept consumer confidence unrevised for the month of September at 76.90, which is the biggest drop in confidence that we have seen in 25 years. Most of the dollar positive releases that we have seen today have actually been attributed to higher inflation rates. The PCE (personal consumption expenditures) deflator as well as the core PCE deflators both edged higher in the month of August. The Chicago PMI provided a bit of a surprise leaping from 49.2 in August to 60.5 in September. Improvements were seen in 6 out of the 7 components led by a gain in the prices paid component. The solitary contraction however was in the employment component, which in our opinion is actually quite important especially heading into next week’s non-farm payrolls report, which is expected to be negative for the first time since May of 2003. There was also talk that the heavy repatriation flows that we saw these past two weeks were primarily related to the rush to take advantage of the Homeland Investment Act tax benefit before the end of the quarter. If this is true, then this demand could slow next week which should clear the air about where the market thinks the US economy is headed next.

Euro
Economic confidence in the Eurozone in improving, which continues to show the widening gap between how companies and consumers in Europe are feeling. Consumer sentiment across the board has been dampened by the political crises as well as high unemployment. Businesses on the other hand are benefiting from the weaker Euro and from signs that the US economic slowdown post Katrina may not be as deep as most may have initially feared. Consumers however have really been struggling. Retail sales in Germany fell for the second month in a row by a much larger than expected 0.8%. The market had actually been expecting a rebound. French consumer confidence remains very subdued, as the economy grew by a paltry 0.1% in the second quarter. Growth in the Eurozone’s second largest country has not exceeded 1% on a quarterly basis since the third quarter of 2003. Inflation though continues to tick higher with the flash estimate for September CPI increasing to 2.5% from 2.4%. Despite hawkish comments from ECB officials, the central bank continues to juggle weak growth with rising inflation, which means that monetary policy should remain unchanged for some time. This weekend, Dresden citizens will be headed to the polls to place their delayed ballots. Although their votes probably wont tip the polls all that much in Germany’s political stalement, more votes to Merkel’s party will certainly give her a louder voice to her claim for Chancellorship.

British Pound
Moving higher in light of the downbeat data, pound sterling favoritism was revitalized during the session as bullish investors reentered the market after a considerable downturn in the high yielding currency over the past few weeks. In line with the recent CBI distributive trends survey, consumer sentiment remains weak in Europe’s second largest economy according to a survey conducted by consultancy GfK. Plagued by higher energy costs, concerns over personal finances, and the overall economy, consumers restrained their everyday spending habits in the month. However, according to the GfK survey big ticket item purchases remained healthy. As a result, economists are now suggesting that the declines in consumption are slowing, similar to confirming evidence in the housing sector, relieving many a Bank of England policy maker as the main focus continues to be looming inflationary pressures. Ultimately, speculation looks to now increase on an absence of further rate cut considerations as different factors of the economy work themselves out. Just in time for the Bank of England meeting taking place next week with another “no change” call being taking into heavy consideration.

Japanese Yen
Investors digested relatively mixed economic data for the day with industrial production, consumer prices and unemployment on tap for the session. Adding to the overall optimism cast by yesterday’s better than expected retail sales figures, household spending data was slightly higher than the 3.3 percent decline in the month of July, slipping 1.3 percent. Although this figure does still indicate rather weak consumption, the slowdown looks to have narrowed a bit, suggesting that previous upbeat consumer sentiment may be disseminating throughout the region. In addition, national unemployment figures improved to a 4.3 percent rate in the quarter. However, nothing could take away from the highly anticipated industrial production and consumer price data. Disappointingly rising at a 1.2 percent pace, overall production fell below estimates of 1.8 percent for the month. However, the figure is encouraging as it reverses the severe decline witnessed in the previous month and finally indicative of positive expansion in the world’s second largest economy. Subsequently, core consumer prices also rose 0.1 percent according to the government’s statistics bureau in Tokyo. Given, the rise was no more than 0.1 percent, there is a nascent suggestion that deflation may be on the way out, coupled with higher crude oil prices. Nonetheless, today’s data sheds more than just a ray of sunshine as policy makers may have received exactly what they were looking for.

 

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