Friday April 30, 2004 - 11:35:19 GMT
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GVI -- NY Open FX Strategy Session
U.S. GDP growth in 1Q04 of +4.2% and Nominal GDP of over 7% were strong figures. They just fell shy of market expectations and the reaction of the forex market reflected disappointment vis-à-vis forecasts and raised some issues about budding inflation. When the dust settles they were not reasons to turn negative on the dollar if one supports a relative growth scenario approach to the markets at the current time. Thus our best guess is that the dollar shortly should start to find support around current levels.
The focus of trade remains squarely on the U.S. economy. Today sees a couple or reports that tend to be closely followed. The Chicago PMI is a poor predictor of the ISM PMI out next week and the University of Michigan “feel good” index is due as well. Next Tuesday the Fed meets. We know rates will not be changed, so the focus will be on the manner in which it starts to prepare us for the eventual tightening of policy that we all know is coming. As we have stated here before, the anticipation of a tightening move is a more powerful market force than the event itself. We have also pointed out that the markets have already tightened for the Fed as of August 10. So if they move as expected on that date the cost of money will not change. The economy is absorbing that rate change right now.
The only number that anyone really cares about is the April employment figure on Friday. The Fed needs jobs to grow so it can back away from its ultra-easy Fed Funds rate. The dollar needs a good outcome to support the relative growth scenario. Street estimates center around an increase of about 200,000 in the month, but we have to warn again that there is a wide probable error range around that point estimate.
Eurozone HICP for April grew +2.0% y/y, vs. +1.7% y/y in March. There is not any hope for an ECB rate reduction in the near future. A BOE rate hike next Thursday is widely anticipated. We have a neutral outlook for the euro and Sterling into the weekend.
In Japan, April unemployment fell to 4.7%, its lowest level since March, 2001 and Tokyo CPI rose +0.2%, -0.1% y/y. The talk is that the BOJ needs y/y CPI at 1-2% before it abandons its ultra-easy monetary policy. They will also be keeping a close eye on developments in the Chinese economy. The Nikkei played catch up following Thursday’s holiday, falling 243 points to close below the key 12,000 line at 11,762. The yen remains at risk on the downside due mainly the psychology surrounding China.
The NY open today sees Personal Income and Personal Consumption expenditures. Later, the final April University of Michigan Consumer Sentiment Index is due. Street estimates are for 94.0 vs. 93.2 in early April. The April Chicago PMI is awaited as well. A level of 59.0 is seen vs. 57.6 in March. Looking ahead, London markets are closed Monday and Japanese markets are closed Monday through Wednesday next week.
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