Tuesday July 6, 2004 - 14:05:14 GMT
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Forex Strategy Session for the Dollar
Except for Japan, markets generally have been in a holding pattern since before the long weekend in the U.S. In Europe, the Dax and FTSE are off modestly and Gilts and Bunds have barely changed. U.S Treasury prices are about unchanged from their Friday close. By contrast the Nikkei has fallen over the past two trading sessions and this has seen prices in JGBs rise and the yen weaken as a consequence. The focus in Japan has been on Upper House elections on next Sunday where the Liberal Democratic Party of PM Koizumi is not expected to do well. Many attribute the recent turnaround in the Japanese economy to his reform policies. Otherwise, oil prices are higher on continuing concerns about the Yukos financial problems in Russia and another disruption in Iraqi oil exports. The dollar is still having problems recovering from the disappointing 112,000 increase in employment in June.
In Japan, a highlight was the press comments by FinMin Tanigaki, who said that the LDP is not facing favorable winds. Polls suggest the opposition Democratic Party of Japan will win the most seats. The election is to choose half the members of a 242-seat upper house, the less powerful of the two-chamber legislature. Markets fear an election setback would hinder the chances for PM Koizumi to curb state spending and push lenders to reduce bad loans. Koizumi hopes the LDP might retain the 51 of the 121 seats it holds that will be contested on Sunday. With its coalition partner, the LDP controls the 242-seat chamber. Higher oil prices to start the new week have weighed on the Nikkei and yen as well.
In Germany, the unemployment data improved in June for the first time since January, with the number of job seekers falling a seasonally adjusted 1,000 to 4.37mln. This translates to an unemployment rate of 10.5%. The street had been expecting unemployment to rise on the order of 10,000. The data continue to show that there is scarcely any dynamism in the German economy and these data do not suggest a turnaround is at hand yet. In the U.K., May Manufacturing production improved 2% yr/yr, while industrial output rose 1.3 percent. Both increases were the highest since last October and are supportive of current Bank of England policy. Thus higher U.K. interest rates should remain in the pipeline. The current BOE Repo rate is 4.50%, a neutrality is broadly seen as around 5.00%.
The Reserve Bank of Australia met Tuesday and will make its policy decision known early Wednesday in Sydney. The odds strongly favor no rate change with the housing sector recently showing fairly consistent signs of slowing. The Cash Rate is 5.25%. It is not clear that rates are at their cycle highs yet, with Retail sales still strong, credit demand strong and job vacancies at a record high. The 90-day bill futures see a rate hike in 4Q04 a second adjustment in 1Q05. Additional moves will depend on the strength of the global economy and demands for exports from China.
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