Monday July 19, 2004 - 11:04:31 GMT
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Forex: US OPEN MARKET POINTS 07-18-04
Business Optimism Vs. Consumer Pessimism
So much for range trading. Friday’s CPI reported a predictably low number and initially the market produced little reaction. But ˝ hour later the disappointing TIC data ($56Bn Vs. 76Bn in April) knocked the dollar for 70 pips against the EUR 70 pips against the JPY and over 100 pips against GBP in a matter of minutes. A decline in TIC which measures foreign investment demand for long term US securities, renewed worries that US will have trouble attracting enough capital to finance its current account deficit.
The week in general has been characterized by a telling dichotomy in sentiment as business confidence exemplified by Empire and Philly Fed surveys rose markedly, but consumer attitudes expressed in Friday’s University of Michigan poll remained far more subdued. A similar dynamic was also evident in Japan where several weeks ago the Tankan survey of businessmen was far stronger then The Cabinet Office's survey of salaried workers. The disparity in attitude is caused by the fact that corporate profits are reaching record levels – in the US after tax profits are at 50 year highs – at the same time as personal wages are growing at 33% below the 20 year average. Absent additional tax cuts or another wave of refinancing, the US consumer is incapable of generating additional demand. Since consumption represents 70% of US economy, business confidence may be misplaced, as weak consumption portends a worldwide slowdown in growth. In that environment the carry trade with its appetite for yield bearing currencies continues to be an interesting choice. For the time being the market agrees. Since we first published this thesis in our July 06th note “the Carry Trade Comeback?” both the Aussie and sterling have appreciated smartly against the dollar while the Kiwi recorded a more modest gain.
Meanwhile, UBS reports that the latest open interest data from IMM shows the largest EUR longs since early January with net speculative positions increasing from 38K to 50K in the last week alone. With the USD approaching 1.25 EUR and 108 JPY- critical levels of concern for export dependent BOJ and Euro-zone officials, and the whole speculative world seemingly short the greenback, the market is probably due for a mild counter trend rally as the Interbank dealers try to bring in and cover the EUR and GBP shorts opened last week.
Key Overnight Developments
- JPY markets closed in observance of Marine Day
- EUR Euro-zone Industrial Production rises slightly above expectations fueled by Scandinavian and East European growth
- Market to focus on Greenspan testimony Tuesday and Wednesday
FX Spot Overnight
- EUR slowly retraces to 2410 in very quiet trading
- JPY shows strengths by creeping towards 108 handle
- GBP loses the 87 handle in a steady stream of profit taking
- CHF back to 2300 in steady USD buying
17:00GMT - (1:00 PM EST) USD NABH Housing Market Index (July) Expected at 67, Previous 67
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