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Monday November 7, 2005 - 21:18:32 GMT
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Forex: Another Day, Another High in the Dollar

DailyFX Fundamentals 11-07-05

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

• Another Day, Another High in the Dollar
• Riots in France Continues to Drag Euro Lower
• Yen Rebounds on Lower Oil Prices

US Dollar

The dollar hit a new 17 month high against the Euro today. With a light economic calendar this week, there is little to detract market expectations from continued Fed tightening. Friday is Veteran’s Day and there are barely any Fed officials scheduled to make comments this week. Even those that are will not be speaking on the economic outlook, but instead their speeches will be focused on banking and regional issues. Therefore the continued trend lower in oil prices and the warmer weather has given the market some additional cause for optimism. This past weekend, the media was jumping on the story that retail gas prices dropped 23 cents nationwide, back to pre-Katrina levels over the last 2 weeks. For many, this is another validating force that Katrina’s impact has been and will be limited. According to the IMM report, the market is very long dollars and sentiment seems to be significantly skewed in that direction, which means that dollar bulls are most likely going to continue to look for opportunities to buy on dips. Even though Friday’s non-farm payrolls report was rather disappointing, the details of the report including income growth and average hours worked improved. The only piece of data released today was consumer credit, which fell $59 million in the month of September. This surprise comes in comparison to the market’s forecast for a $5.8 billion rise. Consumer credit in the month of August however was revised higher from $4.9 billion to $7.9 billion. The big shifts were mostly attributed to borrowing related to automobile purchases, which fell victim to expired discounts and higher interest rates. We already saw evidence of weakness in the sector when total vehicle sales in the month of October where reported at the lowest since August 1998. This should only be the beginning of broader impacts that higher interest rates will have across the economy.

Euro

The Euro continued to weaken against the dollar today following the escalation of riots in the suburbs of Paris as well as a barrage of mixed economic data. The unrest in Toulouse has now extended to the eleventh day with reports today that a first victim has been claimed by the riots. The Prime Minister has vowed to put an end to the riots but minimal progress has been seen. In terms of economic data, even though the retail sales PMI for the Eurozone rebounded from 49.7 to 50.4 in the month of October, retail sales in Germany, the largest economy within the Eurozone is still in contractionary territory, thanks to a reading of 48.1. The index for France and Italy both experienced a slowdown in the expansion from 51.1 to 50.5 for France and 54.4 to 53.7 for Italy. However not all is bad in Germany. First off, the PMI report showed a sharp improvement from the previous month even though the sector is still contracting. Industrial production for the month of September rebounded from -1.5 percent m/m to +1.2 percent m/m. This is a bit stronger than forecasted and a good indication that nice improvements will be seen in third quarter GDP growth. Meanwhile in ECB speak today, ECB President Trichet said that he did not want to add much to the comments he made already last week, choosing instead to only reiterate the central bank’s solidly hawkish stance and their readiness to “move any time.” Trichet did add though that one of the major risks to global growth at the moment is high energy prices. ECB Chief Economist Issing however was much more direct. He said that the central bank cannot “stand by and permit” inflation expectations to rise. Either way, if the Eurozone economy continues at its current pace, a rate hike early next year seems inevitable.

British Pound

Weaker economic data has pushed the British pound back towards its 3 month lows against the dollar. Over these past few days we have been seeing clearer evidence of the extended price action that the pound experiences over the Euro. With the interest rate differential between the British pound and the dollar at only 50bp, the attractiveness of the British pound as a carry trade currency pair is practically nil at this point. Therefore pound bulls have an even less compelling reason to defend the pair. As for economic data, both industrial production and manufacturing production did little to support the pound. Industrial production rose 0.5 percent m/m in September versus expectations for 0.7 percent growth. Manufacturing production fell -0.3 percent compared to expectations for a 0.3 percent rise. Therefore we expect no surprises from the Bank of England this week. Interest rates should be left unchanged once again at 4.50 percent.

Japanese Yen

After six days of back to back gains in the dollar against the Japanese Yen, the Yen has finally managed to eek out a positive day. Interestingly enough, over the past few weeks, we have seen the Japanese Yen slide on positive data and today, rise on negative data. September’s leading economic indicators fell to 50 percent after hitting a high of 100 percent in August. The coincident index also retraced from 80 percent, which pointed to strong expansionary conditions to 55.6 percent, which is equivalent to weak but positive growth. BoJ Governor Fukui also made more dovish comments this weekend at the central bankers’ meeting in Basel. He said that there will not be any abrupt changes to monetary policy so the only catalyst for today’s rally lies in oil prices. As a country that imports nearly all of its oil needs, Japan stands to benefit greatly from the recent retracement in crude prices. If oil prices continue to retrace, the yen could continue to rebound. However if oil prices find support, so could USDJPY.

 

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