Thursday July 29, 2004 - 20:51:46 GMT
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Yen Slides On Disappointing Industrial Production Data
DailyFX Forex Fundamentals 07-29-04
By Kathy Lien, Chief Strategist of www.dailyfx.com
· US Labor Costs Slow
· More Cause For Rate Hikes In UK
· Yen Slides On Disappointing Industrial Production Data
In a day when there are not any significant European economic data and releases out of the US provided no surprises, we revert to the rather disturbing concerns of terrorism. Shortly after the release of US jobless claims, there were rumors that Iraq’s most wanted terrorist Al Zarqawi was captured. This resulted in a quick 40-pip rally in the dollar against the euro. This claim was later denied by Iraqi officials, erasing the dollar’s gains. Around lunchtime, the dollar faced another bout of selling when the Associated Press reported that Iraq militants threatened to kill 1 of 7 hostages. However, the most alarming news on the terrorist front was a statement on an Islamic website threatening European countries to withdraw troops out of Iraq or face “blood baths.” The statement went even further and stated that Italy would be the first target. These new threats come ahead of the end of the three-month truce imposed by Osama bin Laden following the Madrid bombings in April. Concerns about terrorism should continue to grow as we near the November Presidential elections increasing the importance of properly employing stops in the months ahead.
The dollar was unmoved by today’s labor market data, which was pretty much right in line with expectations. Jobless claims increased 345k last week, up from a revised 341k in the previous week. The employment cost index increased 0.9% in the second quarter, indicating that wage growth has slowed from the 1.1% reported in the first quarter. If you recall, last week, Fed Chairman Alan Greenspan stressed that the central bank is closely watching labor costs. Although today’s report will help dollar bears, the annualized increase of 7.2% is still the strongest since mid 1990. The slowing should come as no surprise since yesterday’s beige book did indicate that the “districts reported only modest wage increases.” Wages are “sticky” anyway, meaning that it takes time for higher prices to filter in wages. Tomorrow, we have a big day ahead of us with a significant amount of key US data lined up – Q2 GDP, personal consumption, GDP PCE deflator, UMich Consumer confidence survey and Chicago PMI. This will be a lot to absorb and means that traders should get geared for an interesting trading day. All signs are pointing to weaker GDP growth, particularly after seeing the weak retail sales and durable goods orders reports. The UMich survey could very well echo the sharp rise in Tuesday’s Conference Board consumer confidence survey, while manufacturing should remain rock solid, helping to boost the PMI report. Meanwhile, Switzerland is slated to release their KoF leading indicators report tomorrow.
Judging from the price action in the British pound in the past 24 hours, you would have never guessed that the economic data released today provides the Bank of England with no option than to continue its tightening cycle. According to mortgage lender Nationwide, house prices increased 2.1% m/m and 20.3% y/y. Net consumer credit increased a more than expected 2.1billion, up 30% from the previous month. Consumer confidence as measured by the GfK consumer confidence survey improved from –4 to –3. Housing market data is truly mixed these days, which like any other data tends to get cloudy before there is a shift in trend. However even if the housing market is poised to slow eventually especially since mortgage lending decreased marginally in June, there is no doubt that the Bank of England needs to act to prevent a slowing from becoming a bubble burst. According to the short sterling futures strip, another 50bp of tightening is expected by September.
Since Tuesday of last week, the dollar has soared over 400 pips against the Japanese yen. Last night’s additional acceleration was triggered by a significantly weaker industrial production (IP) report for the month of June. IP fell a worse than expected 1.3% m/m as electronic manufacturers decreased inventories in fear of falling demand. Weaker retail sales in the US have been a cause for concern for companies such as Sony, the world’s largest retail electronic producer. A retracement was expected nonetheless after industrial production soared to a three year high last month. Meanwhile, the Shoko Chukin small business index increased to the highest level since 1990. This is important because the recovery in small businesses have been lagging the larger corporations, causing concern about the scope of the recovery.
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