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Wednesday January 18, 2006 - 22:15:09 GMT

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Forex: No Surprises Leads to Status Quo in Dollar

DailyFX Fundamentals 01-18-05

By Kathy Lien, Chief Strategist of

• No Surprises Leads to Status Quo in Dollar
• Euro Holds onto Gains on Hawkish Comments from ECB Issing
• BoJ Rate Hike Not Expected Anytime Soon After Stock Market Slide

US Dollar

To our disappointment, there was not as much excitement in the market today as we had hoped. Softer inflation numbers and a near in line Treasury International Capital flow report along with an unsurprising Federal Reserve Beige book report kept the dollar tightly wound up against the Euro. With limited data releases on Thursday and Friday, fundamentally it seems that there is little hope for a breakout move this week. However, technically, prices and trading ranges are getting much more consolidated which makes some sort of breakout move is imminent. The inflation numbers released this morning indicated that headline consumer price inflation fell 0.1 percent in the month of December while core consumer prices increased an as expected 0.2 percent. After seeing last week’s higher producer prices, it is clear that companies are still having difficulties passing over higher fuel costs. The combination of tamer consumer price inflation and the possibility that the bottom-line of companies may be hit by the higher costs and lower revenues is one reason why some believe that the Federal Reserve may be at the end of its tightening cycle. The Beige Book report indicated that many Fed districts saw continued growth at year-end with tight labor markets and moderate wage increases. Although there are signs of “some cooling” in the housing market, sectors such as manufacturing saw improvements. The NAHB Housing Index confirmed the lack of growth with the index remaining stagnant at 34 month lows. The market is interpreting no news as good news, especially with net foreign inflows, as measured by the Treasury International Capital report coming at $89.1 billion, which is slightly better than the market’s $85.0 billion forecast. Even though this is less than the previous month’s $104.2 billion rise, it is still a strong report. The details indicate that the UK was a big buyer, but the rumor in the market is that an OPEC nation may have used a UK bank to buy Treasuries. China and Japan were small buyers of dollar denominated assets, which suggests that reserve diversification may not have occurred in November. However as we have postulated yesterday, what a strong number will do is push trade deficit concerns back to the sidelines.


The Euro ended the US session virtually unchanged against the dollar. Economic data released overnight was mixed once again. The French current account deficit ballooned from - EUR 3.8 billion to – EUR 4.1 billion. The market was actually calling for the deficit to narrow. Meanwhile industrial production for the entire Eurozone accelerated by 1.3 percent in November after falling 0.7 percent the previous month. This caught the market by surprise, as some traders may have been banking on an even weaker than consensus release after seeing Italy’s dismal numbers. However, German growth led the pack as the region benefited from the stimulative effects of a weaker Euro. There was also a bit of confusion in the markets today as MF-Dow incorrectly quoted ECB Member Bini as saying that he favors more rate increases. Bini quickly came onto the wires denying such a comment. Yet, with subsequent comments by ECB Issing, the central bank’s overall hawkish bias cannot be denied. Issing said that the ECB does not need to wait for Staff forecasts before making their decision and as far as he can tell, recent data indicates that there is “nothing to show a break in economic recovery” and that “asset prices are overvalued in some areas.” More speculation of central banks on the bid in the EUR/USD has also helped the Euro hold onto its gains.

British Pound

The British pound however was not able to maintain its strength against the dollar. Slightly weaker economic data continues to give some sterling traders a stronger reason to bet on further losses in the GBP. The three month average earnings including bonuses grew at a slower pace of 3.4 percent in the month of November, which compares to the market’s 3.6 percent forecast. The ILO unemployment rate also ticked higher from 4.9 percent to 5.0 percent. The number of unemployed increased for the 11th consecutive month, but on a positive note, the increase was slightly less than expected. The British pound’s relative underperformance against the dollar compared to the Euro is primarily due to different biases of the respective central banks, helping to lift EUR/GBP.

Japanese Yen

The Japanese Yen strengthened across the board against the majors despite a 464 point drop in the Nikkei. Talk of margin calls forcing investors to buy Yen in order to cover their losses has caught the market by surprise. A corporate scandal involving Livedoor, a Japanese high tech company caused such a big drop in the stock market that trading had to halt on the Tokyo Stock Exchange. With such a sharp dive in the stock market, there is an even smaller hope that the Japanese government would allow the central bank to raise interest rates any time soon. Just today, MoF Watanabe said that they would need more than one or two consumer price increases to warrant a rate hike. Japanese economic data was also softer than expected with the leading economic index falling to 54.5 percent from 60.0 percent. Given that the strong rise in the Yen was attributed to forced repatriation related to equity market losses, the question is then whether the move is real. Judging from the recent turn in data and the ramification that the stock market’s slide has on interest rates and the economy, the sustainability of the Yen’s rise appears unlikely, at least for the time being.


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