Friday March 3, 2006 - 21:39:35 GMT
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Forex: Five Central Banks Meeting Next Week
DailyFX Fundamentals 03-03-06
â€˘ Five Central Banks Meeting Next Week
â€˘ Dollar Looks Ahead to Trade Balance and NFP
â€˘ Mixed Data Forces Yen to Give Back Gains
Today was another exciting day in the currency market. First the dollar sold after the weaker consumer confidence numbers, but the rally did not extend very far as traders treaded carefully ahead of the service sector ISM number. As if the market was waiting for a reason to buy dollars, the greenback skyrocketed after the stronger ISM report. Increasing to 60.1 against expectations of a weaker acceleration to 58.0, business activity in the service sector has improved quite a bit in the month of February. However, the dollar gave back most of its gains through the rest of the US trading session as traders realized that overall, even though the non-manufacturing ISM came in strong, the rest of the data we have been seeing still suggest that the Fed is nearly done. Next week, the US calendar is fairly light, especially in the beginning of the week. On Thursday and Friday however, two very important releases are due for release - the trade balance for the month of January and non-farm payrolls for the month of February. The trade deficit is expected to increase, but given that we have had only one month of funding deficiency as measured by the Treasury International Capital report, the dollar may not react too much to the report. Payrolls on the other hand are expected to be extremely strong given the low level of jobless claims over the past few weeks. In the meantime, the marketâ€™s primary focus will be on the five central banks meeting to decide on interest rates. The Bank of England, Bank of Japan, Bank of Canada, Reserve Bank of New Zealand and Australia will all be announcing interest rate decisions. Aside from Japan and Canada, none of the other central banks are expected to make any ground breaking announcements â€“ the UK, Australia and New Zealand are expected to leave interest rates unchanged. The Bank of Japan will most likely do the same, but after recent comments this week, some traders are expecting the central bank to possibly drop quantitative easing. The Japanese will also be releasing their monthly report, which will most likely build on their desire to start tightening monetary policy. As for Canada, they are expected to increase interest rates once again. With the Loonie trading at 14 year highs against the US dollar and oil prices rising once again, the rate hike by the Canadian central bank will only fuel more gains in the CAD. With so many major central banks meeting and the US releasing two key pieces of economic data, we are expecting a lot more volatility in the week ahead and for traders to focus even more closely on other central banks that will be tightening monetary policy this year.
Despite a brief intraday dip, the EUR/USD has held onto most of its gains from the prior day. Trichetâ€™s relatively hawkish comments yesterday have cemented the ECBâ€™s role as one of the next major central banks to raise rates in the second quarter. Economic data released are once again encouraging with the regionâ€™s service sector PMI rising from 57.0 to 58.2. Improvements were seen in France and Italy, but the index for Germany fell modestly from 58.1 to 57.8. Fourth quarter GDP growth remained unchanged at 0.3 percent due to weak exports and domestic consumption. However, GDP is always seen as a backward looking indicator. The ECB has already made known their belief that growth will be accelerating this year. In the week ahead, there are still a number of important Eurozone economic indicators to watch for including retail sales, German factory orders, industrial production and current account balance along with French industrial production and Italian GDP. Look for more signs of stronger growth and hawkish comments to continue to fuel gains in the Euro.
After yesterdayâ€™s strong rally, the British pound extended its gains today thanks to a sharp rise in the service sector PMI report. The index jumped from 57.0 to 58.9, which follows yesterdayâ€™s strong construction sector PMI report. Despite the stronger data though, most of the gains are really attributed to dollar weakness rather than pound strength. Although the highlight next week is the Bank of England rate decision. The fact that the BoE is not expected to make any moves and because they do not make any comments when leave rates unchanged, the market may choose to focus more on the other pieces of data due out next week. We are expecting the BRC retail sales report, industrial production and trade balance for the month of January.
Mixed economic data released last night caused some traders to worry about when the Bank of Japan may actually be dropping their quantitative easing policy. Even though core national CPI came in stronger than expected in the month of January, growth in consumer prices in Tokyo for February was slower than expected. Household spending also took a surprisingly sharp dive while the jobless rate edged higher. The market was really looking for strength across the board and the fact that the data failed to deliver prompted a strong sell-off in the Japanese Yen. This has pushed expectations for an interest rate hike out to April instead of March. Tighter monetary policy however is inevitable, so this rally in USD/JPY could be nothing more than a retracement.
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