Wednesday November 2, 2005 - 23:14:43 GMT
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Forex: Dollar Awaits for Direction from Greenspan
DailyFX Fundamentals 11-02-05
• Dollar Awaits for Direction from Greenspan
• Pound Shrugs Off Weaker Data
• Yen Extends Slide Following Dovish Comments from Policymakers
Profit taking in the dollar has led to mild weakness today. The lack of any meaningful US economic data has given some traders a good reason to reduce positions ahead of two days that will be jam packed with key data releases. Tomorrow we are first expecting the US jobless claims report which should shed some light on how well the US labor market has been performing post Katrina and give the market some talking points going into Friday’s non-farm payrolls report. Then at 10am, we will receive ISM non-manufacturing and factory orders. Given the recent trend of general activity reports, there is a very strong likelihood that these releases will be dollar positive. However the real show stealer will be Greenspan’s speech which begins at noon (EST). Although nothing new is expected to come out of his mouth, we do expect his reiteration that monetary policy is still accommodative and that inflation remains a major concern to be positive for the dollar. Therefore today’s retracement could be nothing more than that. The risks for not only Thursday’s data but also for Friday’s non-farm payrolls report is mostly to the upside for the dollar. At this point each attempt by dollar bears to push the currency lower has been met with fierce resistance. Softer oil prices are also providing a double stimulus for the dollar even though consumers will soon have to come to terms with higher energy bills. They have been cushioned by the unseasonably warmer weather, at least here in the Northeast, but once the chill spreads nationwide, that cushion could deflate.
Leaked late yesterday, Germany’s unemployment figures continue to be rather downtrodden as the headline figure remained above 11 percent for the 10th straight month. However, much to the chagrin of Euro bears, the underlying spot rose on the session as speculation surrounded near term rate hike talk. Now with inflation rearing its ugly head in the form of higher energy prices, central bankers have fed the market considerations of finally lifting its benchmark rate from the six decade low of 2 percent. Subsequently, this highlights the necessity of such an increase given the continually gloomy economic picture of the region. Granted, economic data has been on the positive side as illustrated by higher factory orders and manufacturing data. However, most of the increases could be attributed to a depreciated single currency and a boost in global foreign consumption. Additionally, the increase in prices may be simply regarded as a temporary anomaly as crude prices have spiked in recent months to add to producer prices, ultimately feeding into the consumer level. Still, the infrastructure remains weak with consumer demand and confidence relatively low, both considerably important to a healthy economy. Ultimately, the test may be in the form of holiday spending, if consumers are willing.
Gloomy news for the United Kingdom as further suggestions of economic slowdown was released in the overnight session. First, according to the CBI October Distributive Trades Survey, retailers were continually plagued by consumer disinterest and slumping sales. Putting figures behind the pessimism, only 24 percent of retailers experienced positive sales. In fact, the data indicates that some retailers see their number of customers at the lowest level in seven years. Secondly, construction activity fell in the same month according to the Chartered Institute of Purchasing and Supply. The weakest pace of growth since May, declines were seen in the housing sector, which fell for the first month in five. However, the figures may not be as gloomy as some bears would like, ultimately prompting central bankers in considering a rate cut. Given the fact that the distributive trades survey remains pessimistic, it has rebounded from sales figures that were the weakest in its 22-year history last month. Additionally bolstering the notion for a pickup is the upcoming holiday season as consumers may be saving up to spend come December. In regards to the weak CIPS construction data, the fact of the matter remains that growth still remains founded as the figure continues for the 47th month above the 50 expansionary reference.
The yen weakened further in the session on comments by two policy makers that the central bank may not be as forthcoming with interest rate hikes as the market previously expected. Earlier in the session, Finance Minister Sadakazu Tanigaki and Chief Cabinet Secretary Shinzo Abe expressed their continued favoritism towards a zero interest rate policy. Based on the fact that deflationary conditions have not been completely rung through, Abe stated that the Bank of Japan should continue in retaining a “monetary easing policy”. As a result, the comments sparked concerns that domestic investors will continue to invest in subsequent G7 economies, passing aside their own 1.5 percent yielding yen bonds for higher rates of return. This idea is exactly the reason why it seems the Japanese yen is mimicking the price action seen late in 2004 involving the Euro. Traders will remember in particular that, although technically overextended, the currency held up lofty valuations till the onset of the New Year. The exception in this case, is that fundamentals are justifying a lower rate rather than a higher one. As a result, more emphasis will be placed on indications of rising prices as it seems the only factor in preventing a corrective valuation as foreign investment continues to pour into the region.
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