Friday January 27, 2006 - 21:14:10 GMT
Share This Story
FXCM - www.dailyfx.com
Forex: Dollar Breaks Higher as Snow Downplays Weak GDP Report
DailyFX Fundamentals 01-27-06
By Kathy Lien, Chief Strategist of www.fxcm.com and www.dailyfx.com
â€˘ Dollar Breaks Higher as Snow Downplays Weak GDP Report
â€˘ Swiss Suffers on Weak Data
â€˘ Governmentâ€™s Persistence in Keeping ZIRP Offsets Stronger Data
It has been quite a see-saw ride in the markets today as we first watched the dollar sell off significantly against the majors after the weaker than expected fourth quarter GDP report to then completely reverse the move and hit a new daily high against the Euro. Price action wise this caused the EUR/USD to take out the 1.2150 support level and hit a low of 1.2087. The speed and depth of the move tells us that the triggering of stops at various levels exacerbated the sell-off, especially at the London close. The only fundamental explanations for the move are two fold, but bottom-line, it all boils down to the Fedâ€™s rate decision. New home sales increased 2.9 percent in the month of December by a more than expected 1.26 million. Coming off the heels of a weaker existing home sales report, the strength caught the market by surprise and it certainly didnâ€™t hurt that US Treasury Secretary Snow came on the wires 10 minutes before the home sales release downplaying the significance of the earlier GDP report. He cautioned against paying too much attention to the GDP report since he expects upward revisions in the months to come and ultimately he feels that the economyâ€™s performance is still sound. This left the market with the impression that todayâ€™s release was an outlier, especially since the personal consumption and GDP price index figures were stronger than expected. What is most important is that despite the weaker GDP number, expectations for a March rate hike is still intact and in fact, ticked higher modestly. There is now an over 70 percent probability that we will see 4.75 percent rates by the end of the first quarter. The type of volatility that we saw this week is set to continue well into next week thanks to a heavy economic calendar. The number one event to watch will first be the Fedâ€™s January 31st rate decision. As the last one that Greenspan chairs, the market will be watching carefully to see if there are any major shifts in tone. A more neutral statement would be not be surprising and should only be taken as mildly dollar bearish at best. If the statement is more cautionary about inflation or energy price pressures, that would be taken as dollar bullish. After the FOMC rate decision, we still have manufacturing and non-manufacturing ISM, Chicago PMI, Factory orders, and the ever important non-farm payrolls report.
Trading in the EUR/USD currency pair today was left to the whim of the dollar as
money supply and Italian business confidence served as the only releases on the Eurozoneâ€™s economic calendar. Annualized money supply growth slowed from 7.6 percent to 7.3 percent, which was slightly worse than expected. Italian business confidence increased from 91.2 to 92.7. The calendar next week will be far busier with labor market, retail sales, confidence and manufacturing reports due for release. Of more interest today however, were the releases from Switzerland, which fell short of expectations, helping to spark a sell-off in the Franc against both the Euro and US dollar. Retail sales growth slowed from an annualized 2.8 percent to 2.2 percent in the month of November. The KoF report of leading indicators came in at 1.22, which was far short of the marketâ€™s 1.42 forecast for the month January. The index for the previous month was also revised downwards from 1.36 to 1.17. Such disappointing numbers puts to question the strength and sustainability of the Swiss economic recovery as well as whether the Swiss National Bank will opt to increase rates once again by 25bp. If you ask the President of the Swiss National Bank, he would probably give a resounding yes since it was only Wednesday that he viewed the 2006 economic outlook as â€śexcellent.â€ť
Like the Euro, the British pound suffered greatly against the dollar today. Mortgage lending figures released by the British Bankerâ€™s Association was slightly more encouraging with mortgage lending in the month of December up 25 percent from the year prior. The group also reported that this was the strongest monthly rise since June 2004. Although the dollarâ€™s rally masks the marketâ€™s true perception of the UK housing market and growth, this morningâ€™s much stronger rally in the pound versus the euro may be indicative of the marketâ€™s gradual shift. Signs of a possible stabilization in the UK have some believing that another rate cut by the Bank of England is far from certain. In the week ahead, we will have a bit more housing market data including the Nationwide house prices and mortgage approvals to shed some more light on the issue as well as manufacturing and construction sector reports.
Today marked the fourth straight day of gains in the dollar against the Japanese Yen with virtually no retracement. Bullishness following stronger inflation and consumer spending reports released overnight were offset by dovish comments from Heizo Takenaka, the Minister of State for Economic and Fiscal Policy. Consumer price inflation for Tokyo increased 0.5 percent in the month of January with a 0.2 percent rise in core prices. This was much stronger than the marketâ€™s respective 0.2 percent and -0.1 percent forecasts. National CPI reports for December were also stronger on a headline level, but core prices remained unchanged. Retail sales increased 0.8 percent for December, which were double expectations with an upward revision in November sales from negative 0.2 percent to positive 0.2 percent. Despite the signs that deflation is receding, Takenaka was quick to come on the wires warning about how deflation is not finished. Clearly the Japanese government and its officials have an agenda to keep the Yen weak and monetary policy stimulative.
Forex Trading News
Daily Forex Market News
Forex news reports can be found on the forex research
headlines page below. Here you will find real-time forex market news reports
provided by respected contributors of currency trading information. Daily forex
market news, weekly forex research and monthly forex news features can be found
Real-time forex market news reports and features providing
other currency trading information can be accessed by clicking on any of the
headlines below. At the top of the forex blog page you will find the latest
forex trading information. Scroll down the page if you are looking for less
recent currency trading information. Scroll to the bottom of fx blog headlines
and click on the link for past reports on forex. Currency world news reports
from previous years can be found on the left sidebar under "FX Archives."