Wednesday July 21, 2004 - 19:59:57 GMT
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Greenspan Repeats Optimistic Comments; Other Fed Officials Also Bullish
DailyFX Forex Fundamentals 07-21-04
By Kathy Lien, Chief Strategist of www.dailyfx.com
· Dollar: Greenspan Repeats Optimistic Comments; Other Fed Officials Also Bullish
· British Pound: Hawkish Monetary Policy Meeting Minutes
· Dollar Yen: Cabinet Office Upwardly Revises Growth Forecasts
Broad dollar strength helped to send the euro tumbling another 140 pips. The only releases from the region this morning were Italian consumer confidence and trade balance. Confidence improved in the month of July, which is the first since March. A rebounding global economy and increasing consumer spending has helped to boost overall optimism. In terms of trade, Italy reported an unexpected trade surplus for the month of May as exports increased 7.9% yoy while imports increased 5.0%. Gains in exports were led primarily by increases in machinery exports (12.7%), refined oil products (40%) and metal products (28.5%). Tomorrow, we are expecting more important data, including the Eurozone trade balance, as well as German and Eurozone industrial production.
The US dollar vaulted higher against most major currencies for a second straight day today, as Alan Greenspan’s remarks before the House continued to drive the dollar. Once again, all eyes were on Alan Greenspan. Yesterday, the Federal Reserve chairman predicted that a recent slowdown in consumer spending would be short-lived, and said that the US central bank is prepared to raise interest rates more quickly if inflation suddenly worsens. Greenspan made similar comments today but clarified his comments on foreign interest in US treasuries and the deficit. Yesterday, he said that there is a risk that foreigners may stop buying dollars at some time and that the US trade deficit needs to decrease. Today he said that he sees no falloff of foreign interest in treasuries and that the US is nowhere near a problem with current account. He also talked about the carry trade by saying that the Fed would act if carry trades caused a bubble. For the time being, the “risks in taking extended positions in the carry trade products is clearly being unwound.” Equally bullish comments also came from Fed Presidents McTeer and Ferguson. Traders responded by buying US dollars as Fed officials reaffirmed their bullish outlook. Meanwhile, the only economic release today was mortgage applications, which fell for the second straight week, as rising interest rates made home loans more expensive. According to the Mortgage Banker’s Association, demand for mortgage loans fell 4.0% on the heels of the previous week’s 6.3% decline. Housing has been one of the strongest areas of the US economy for the past several years; weakness in the housing sector would be a negative for the US economy and for the US dollar.
The British pound declined for the third consecutive day despite more hawkish MPC minutes. According to the minutes from the July 8th monetary policy meeting, although the MPC voted unanimously to keep rates unchanged at 4.50%, they did debate the possibility of increasing rates for the fourth time this year. However, the committee decided to refrain from raising rates in fear of the market’s reaction and misinterpretation of the central bank’s aggressiveness. With the front short sterling futures contracts pricing in an implied yield of 4.72% and the September contracts pricing in an implied yield of 5.00%, there remains a high likelihood that the Bank of England will deliver a rate hike on August 5th. The BoE did say that rate hikes will still be needed given tight labor markets and “little, if any spare capacity” in the economy. Unfortunately in the past 2 days, the GBPUSD has decoupled from UK fundamentals and instead has taken direction from the US dollar. With retail sales and Q2 GDP slated for release over the next two days, we could see a pound led retracement.
The Cabinet Office officially revised upwards its 2004 economic growth forecasts from 1.8% to 3.5%. They believe that the weakness in the labor market is finally coming to an end. As such, personal consumption is predicted to grow an annualized rate of 2.6% in real terms in 2004, compared to the 1.1% that they predicted seven months ago. Since January, the unemployment rate has declined from 5.0% to 4.6%, while the job to applicant ratio has increased from 0.77 to 0.80. The ratio was as low as 0.51 in January 2002, when unemployment was at 5.4%. Policy makers continue to be optimistic about Japan’s growth prospects and this revision can be seen as another official stamp of approval that the recovery is here to stay. However, like all of the other pairs, the more optimistic developments for the yen have failed to help suppress the strength of the dollar. Tonight, we are expecting the Japanese trade balance, which is expected to indicate that exports remain robust.
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