Wednesday July 21, 2004 - 11:23:52 GMT
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Forex: US OPEN MARKET POINTS 07-21-04
Alan the Bull
In yesterday’s Senate testimony Alan Greenspan stated that the risks of instituting a more restrictive monetary policy are ``outweighed in our judgment by those that would be associated with maintaining the existing degree of monetary policy accommodation in the current environment.” In other words: prepare for August rate hike. Accordingly, since yesterday the EUR quickly lost over 100 pips and GBP dropped well over 200 pips as traders adjusted to the possible narrowing of yield differential.
Bloomberg’s John Berry summarized Mr. Greenspan’s upbeat message by writing, “Federal Reserve officials are an optimistic lot. They expect economic growth to accelerate moderately to a 4.5 percent rate or more in the second half of this year as unemployment inches down and core inflation remains flat or even falls a bit.” Yet, in deconstructing Mr. Greenspan’s position we find little empirical evidence for such a sanguine view. Recent GDP data was actually revised downward from 4.4% to 3.9%, payrolls came in markedly lower at 112K from an expected 240K and in July almost every economic statistic from Industrial Production, to Capacity Utilization, to Retail Sales has surprised to the downside.
Furthermore, Mr. Greenspan’s contention that inflationary pressures are “transitory” is difficult to accept as oil trades back above $40/bbl and seems destined to stay there for the time being. The oil market dynamics are buoyed by continued attacks on Iraqi pipelines and Vladimir Putin’s relentless prosecution of Russia’s largest oil producer Yukos, which has a daily output greater than all of Lybia. Indeed oil remains the wildcard threat in all economic scenarios as it can simultaneously cause a rise in inflation and a decline in worldwide growth.
Perhaps Mr. Greenspan is right. Perhaps the 2nd half of the year will show strong growth, low inflation and moderately rising rates --providing USD bulls with an ideal environment for gains. As he enters his 2nd day of testimony in front of Congress Mr. Greenspan will need to further elucidate his bullish views.
Key Overnight Developments
- JPY Nikkei bounces off 6 week low gaining 175.49 points (1.56%) to close 11,433.86
- GBP MPC voted 9-0 to keep rates unchanged at June policy meeting
- Greenspan 2nd day of testimony central focus of day as eco calendar is light
FX Spot Overnight
- EUR tags the 23 handle as dealers re-position in light of compressing rate differential
- JPY crosses 109 but well bid through Asia and early European sessions on strength of Nikkei
- GBP dives through 85 as sentiment changes on further yield gains
- CHF trades over 2450 but holts way ahead of 2500 handle
14:00GMT - (10:00 AM EST) USD Greenspan House Testimony
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