Friday March 10, 2006 - 21:42:42 GMT
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Forex: Twin Deficits Expected to be Focus Next Week for Dollar Traders
DailyFX Fundamentals 03-10-06
By Kathy Lien Chief Strategist of www.fxcm.com
â€˘ Twin Deficits Expected to be Focus Next Week for Dollar Traders
â€˘ Pound Weakens Against Both Euro and US Dollar
â€˘ Six Consecutive Days of Gains in USD/JPY
Today was non-farm payrolls Friday but you may not necessarily know that if you were just watching the marketâ€™s price action. Comparatively speaking, the dollarâ€™s reaction to the mixed non-farm payrolls report was far tamer than most traders were probably expecting. After much fan-fare, many traders had positioned for major post payroll volatility especially since the whisper number was set so high. When the actual number was released however, the EUR/USD sold off approximately 30 pips but recuperated most of its gains within the next five minutes. The currency pair then stalled another 30 minutes before finally breaking lower. The slide found support at Tuesdayâ€™s low and spent the rest of day licking its wounds and eventually ended back up at its pre-NFP levels. For the month of February, Non-farm payrolls increased 243k vs expectations of 210k. Although the headline number was stronger than the printed forecast, it came in below the much talked about whisper number of 300k. Furthermore, the previous month was revised down from 193k to 170k with the unemployment rate inching up to 4.8 from 4.7 percent. Average weekly hours declined from 33.8 to 33.7 while manufacturing payrolls saw the first month of decline after four consecutive months of gains. Overall, the report leaves an air of uncertainty about the underlying strength of the US economy. The fact is that the housing market is still showing signs of slowing and the lackluster number will do little to boost consumer sentiment. With the Fed funds rate almost certain to be raised to 4.75 percent, the question still remains whether 5 percent will be the cap. The initial reaction in the dollar indicates that the predominant theme is still the marketâ€™s obsession with 5 percent rates. This view is helped by comments from Fed President Fisher whose words sparked the dollarâ€™s earlier rally. According to Market News International, he said that the Fed should â€śerr on the side of being a little bit tighter.â€ť As a voting member this year, his comments should be taken lightly. Finally, the lackluster NFP number did not give the market the clear direction that it was looking for. Ultimately, even though the number did not hurt the dollar significantly in the short term, it did little to help it. Meanwhile the Treasury also reported that the budget deficit hit a record high in the month of February. New highs in both components of the twin deficits is a topic that we expect to come back into the limelight next week when the market shifts its focus to the TIC (Treasury International Capital flow) report.
The Euro recovered most of its post NFP losses to end the trading day virtually unchanged. Data released this morning continues to be mostly positive for the Euro. German consumer prices for the month of February were confirmed at 2.1 percent annualized, which is above the central bankâ€™s target. The trade balance also came out in line, with the surplus rising from 9.2 billion to 12.5 billion. Both imports and exports surged more than expected, which is certainly encouraging for the export dependent economy. Over in France, industrial production was softer, rising by only 0.3 percent. Manufacturing production and the trade deficit however both came in stronger than expected. In the week ahead, from the Eurozone, we are expecting more inflation figures such as CPI from France, Germany and Italy along with industrial production figures and the German ZEW survey of economic sentiment. The Swiss National Bank is scheduled to hold their quarterly monetary policy meeting at which they are expected to raise interest rates by another quarter point.
With no economic data released today, the British pound weakened against both the Euro and the US dollar. The hawkish bias of both central banks in relation to the UKâ€™s dovish to neutral stance has kept the British pound under pressure since the fourth quarter of last year. More recent focus on the hawkishness of the ECB and Fed has exacerbated the losses, pushing the pair towards its 2 year lows. The only hope for a recovery in the GBP/USD would be for the market to turn bearish US dollars based upon some poor numbers released next week. In terms of the UK, we are expecting the release of employment, producer price inflation, house price and retail sales figures.
The dollar has seen six consecutive days of gains against the Japanese Yen. The last time we saw such a prolonged period of strength was back in late October, when we saw the move retrace on the seventh day. Although there has been a monumental change to Japanâ€™s monetary policy this past week, the Bank of Japan downplayed a more significant move that would involve shifting interest rates above zero, which was really what the market was looking for. Even though they dropped quantitative easing, zero overnight rates still makes the Yen an attractive funding currency for carry trades. Meanwhile economic data released overnight was mixed. Consumer goods price inflation increased 2.9 percent to the highest level in 15 years. Machinery orders and household spending however dipped in the month of January. Meanwhile in the week ahead, the Japanese economic calendar is light with only the second release of Q4 GDP, confidence, current account and industrial production numbers due for release.
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