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Monday February 27, 2006 - 22:11:23 GMT

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Forex: Dollar Steady as US GDP Expected to be Revised Higher

DailyFX Fundamentals 02-27-06

• Dollar Steady as US GDP Expected to be Revised Higher
• Sharp Money Supply Growth Makes ECB Rate Hike a Given
• Japanese Government Endorses BoJ Decision Exacerbating Yen Rally

US Dollar

The US dollar gained strength against the Euro and British Pound, but its weakness against the Japanese Yen and Canadian Dollar completely overshadowed its performance against the two more liquid currencies. Starting off what is expected to be a very busy week, we had weaker new home sales reported this morning. Falling 5 percent on the month, new home sales were 1.233 million versus the market’s forecast of 1.265 million. Inventories hit a record high, raising continued concerns that the housing market may be floundering. With new condo developments still springing up left and right in New York, California, and Florida, the slowing sales of new homes is particularly concerning. We have always said that the first indication of waning demand is a buildup of inventory and according to today’s report that is exactly what we have been seeing. There is also word that home sales were able to increase only because of additional free add-ons that builders are providing such as flat screen TVs and upgraded floors. CNN Money reported Friday that more people are cancelling their purchases of new homes due to an inability to sell their previous homes. If the housing market continues to show signs of slowing, people may just give up on their down payments rather than get stuck in a losing investment. Yet even though housing is fading, the low level of jobless claims should be very good news for consumer spending, confidence and ISM reports. Tomorrow’s fourth quarter GDP figure is also up for revision. As signaled shortly after the advance release by the government, the number was somewhat distorting and expected to be notched higher at the next release. The market is forecasting an upward revision from 1.1 percent to 1.6 percent.


The Euro extended Friday’s weakness despite faster than expected money supply growth last month. M3, the broadest definition of money supply grew by 7.6 percent compared to the market’s forecast for 7.3 percent growth. Household borrowing also grew by 9.4 percent, which was the fastest pace of growth in close to six years. With such a rapid rise of borrowing, there is no wonder that the European Central Bank will be looking to raise interest rates on Thursday. A quarter point interest rate hike has been completely priced into the market, which is part of the reason why the Euro is not rallying into the meeting. However, what the market is not anticipating is significantly hawkish comments from the central bank. Everyone expects the ECB to continue raising rates conservatively since they rarely have a vested interest in seeing the Euro increase significantly in value. As an export dependent region, the Eurozone should have benefited significantly from the Euro’s sub 1.20 value over the past month. There are a lot of economic data due for release from the Eurozone tomorrow including German and French unemployment figures, Eurozone CPI, and consumer confidence. With most releases being for the month of January or February, we expect the figures to show improvements in the economy.

British Pound

The British pound tumbled for the second consecutive day in the face of mixed economic data. The narrowest measure of money supply growth, M0 fell 0.1 percent this month after strong growth last month. The weaker pace of growth dragged annualized acceleration down from an upwardly revised 6.6 percent to 6.2 percent. Meanwhile housing market reports mixed. House prices as measured by hometrack accelerated by the fastest pace in 20 months in February but mortgage approvals according to the British Bankers Association fell by 12.1 percent last month. Tomorrow we are expecting more housing market figures with Nationwide House prices due for release along with the Gfk Consumer Confidence survey and the CBI Distributive Trades report. More weakness or mixed data should not be surprising as the UK economy continues to struggle to recover. Compared to the rest of the world, the UK calendar is relatively light, which means that the British pound’s value against the Euro and US dollar will most likely be determined by Eurozone and US developments.

Japanese Yen

The big winner today and in fact over the past 4 trading sessions has undoubtedly been the Japanese Yen. Having first rallied on hawkish comments from Bank of Japan Governor Fukui and then a subtle announcement by the People’s Bank of China, the Yen is now soaring on the latest endorsement by the Japanese government. If you recall, we had said that the one thing standing in the BoJ’s way is the Japanese government, who adamantly opposed the removal of quantitative easing. Last night however, we saw the first and rather clear sign of the Japanese governing shifting sides. The Prime Minister himself said that the final decision on monetary policy is “up to the central bank.” An article in a Japanese paper (Yomiuri Shimbun) quoted “sources” as saying that the government would be fine if the BoJ decided to end quantitative easing at the March 8-9 meeting. With the Japanese government now backing the BoJ’s stance, a move in the next two months now becomes very likely since we have the endorsement that we have been waiting for and the barrier that has been blocking such a move is now dissipating.


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