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Tuesday April 25, 2006 - 21:31:07 GMT

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Forex: Yen Retraces Against All Majors

DailyFX Fundamentals 04-25-06

By Kathy Lien, Chief Strategist of

- Dollar Moves Limited as Market Wonders Whether Strong Confidence and Existing Home Sales Can be Repeated
- Euro Shoots Higher as Business Confidence Rises to 15 Year Highs
- Yen Retraces Against All Majors

US Dollar

Earlier gains in the US dollar were reversed as the market questioned the sustainability of the stronger economic reports. Soaring oil prices seemed to have little impact on the sentiment of consumers as their confidence hit 4 year highs. The market was expecting confidence to dip from 107.2 to 106.2, but instead it jumped from an upwardly revised 107.5 to 109.6 for the month of April. It seems that the comfort of a booming labor market is offsetting the strain that consumers may be feeling at the pump, but if pump prices continue to rise, it is only a matter of time that sentiment also turns sour. Taking a look at the previous rallies that we have seen in oil over the past year, such as the June to August move and then the December to January move, it wasn’t until we hit a peak in oil that consumer confidence began to topple. In both instances confidence saw big jumps before paring back significantly. Another piece data that came in stronger than expected but its sustainability remained questionable was the existing home sales report for the month of March. Existing home sales increased from 6.9 million to 6.92 million. Although the actual increase was nominal, it was substantial compared to the market’s forecast for a dip to 6.66 million. The worry is that existing home sales tends to be a lagging indicator because it reflects sales that were completed in March. This means that the actual purchase was probably made a month or two before that. Even though tomorrow’s new home sales report is for a smaller sector of the overall market, it tends to be seen as a more reliable reflection of how well the housing market is currently doing because the sales are recorded in the index as soon as the initial contract is signed. There was a huge drop in new home sales reported last month which suggests that a rebound is not out of question. However, if the rebound comes in far higher than the current forecast, then the arguments for a stabilizing real estate market may be more accurate. Durable goods are also on tap tomorrow along with the Beige Book report. Market expectations suggest that both could to be bearish for the dollar. Against some currencies, we have seen an extension of dollar weakness while for others, today will probably prove to be nothing more than a mere retracement.


The Euro is stronger today thanks to mostly positive economic data. To the surprise of the market, German business confidence shot to a 15 year high in the month of April. This is also the index’s fifth consecutive monthly rise. Originally expected to dip, the index instead rose from 105.4 to 105.9. Increases were seen in both the current assessment and expectation components of the report, reflecting the economic recovery that is occurring in the Eurozone’s largest economy. Although some skeptics say this may be the peak in the IFO report, it nevertheless confirms the need for the central bank to remain hawkish. This is especially true after the big jump in German consumer prices in the month of April. The annualized rate of CPI growth increased from 1.8 percent to 2.0 percent with the harmonized rate rising from 1.9 percent to 2.3 percent. This brings the CPI back to levels that should raise concerns at the European Central Bank. Last night’s comments from ECB President Trichet was bullish on growth but he downplayed a May rate hike again by saying that the ECB needs to remain “extremely cautious” given the “potential dangers” that high oil and commodity prices can unleash on the global economy. For the most part, he focused his speech on calling for more appreciation in Asian currencies in general and not just China. The improved performance of the Eurozone and the divergence from the pace of growth in the UK continues to benefit the EUR/GBP cross. Finally, the only damper in today’s basket of data was trade numbers which came in mixed. Current account for the region widened more than expected but the trade balance came in narrower.

British Pound

The British pound strengthened against the dollar for the third consecutive day. CBI industrial orders for the month of April was the only piece of data released today. The index improved from -16 to -11 in March, which is the highest reading in the index since Feb 2005. Tomorrow the market will be anticipating the first quarter GDP. Growth is expected to remain stable at 0.6 percent . The country’s gradual recovery would be consistent with recent data. Wage growth was also stable at 3.0 percent. For the time being, unless a new wave of merger and acquisition news sweeps the UK, the British pound will continue to trade based upon dollar factors or its relative performance compared to the Eurozone economy.

Japanese Yen

After Monday’s extensive moves, the Japanese Yen gave back a small portion of its gains against the majors today. In general, over the past few months, moves to the downside in dollar yen have been far more brutal than moves to upside. The reason is because the risks for the Yen are more weighted to the downside than the upside. The only upside factors keeping the yen lifted are higher interest rates in the US and the Bank of Japan’s zero interest rate policy. However if there was ever to be a surprise similar to the one this weekend, the possibilities are greater in favor of the yen than the dollar. The market has been hanging onto the possibility of either more revaluation from China or a much anticipated move on monetary policy from the Bank of Japan – both of which would be positive for the yen and negative for the US dollar.


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