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Friday July 30, 2004 - 20:18:10 GMT -

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Yen Recuperates As Stock Market Rallies on Banking Sector Merger Developments

DailyFX Forex Fundamentals 07-30-04

By Kathy Lien, Chief Strategist of

  • Dollar Whipsaws on Mixed US Data – Weak GDP but higher Chicago PMI

  • German Retail Sales Increases By Fastest Pace in A Year

  • Yen Recuperates As Stock Market Rallies on Banking Sector Merger Developments


    Rock and roll action in the euro today as the single currency rips higher on a substantially weaker Q2 GDP report, but then gives back all of its gains as Chicago Purchasing Managers Index (PMI) bounces 14% from the steep retracement in June which followed a 16-year high in the index (more in USDCHF section). A shift may be in the works as consumers in the US have stopped spending, while consumers in Germany are finally dishing out their euros. German retail sales increased 1.8% in June, which was the strongest rise in a year. In fact, we’ve seen nothing more impressive than near zero to negative spending by Germans since January. An improving labor market and decreasing layoffs have helped boost consumer confidence. Germany still has a long way to go, especially since GDP growth in first quarter was a paltry 0.4%. Contrary to the German data, France reported worse than expected labor market data and weaker consumer confidence. The unemployment rate increased to 9.9%, which matched the highest rate in four years. Companies have been cutting jobs to reduce costs, which will certainly have a negative effect on French consumer spending. Although the French economy grew twice as fast as Germany’s, this growth differential should narrow if the recent trend continues. In the weak ahead, we are expecting lots of key European manufacturing sector data including PMI reports and German industrial production.


    US GDP increased 3.0% in Q2, far below the market’s estimate for 3.7% GDP growth. With retail sales so weak during the month of June, it should be no surprise that consumer spending, which accounts for 70% of GDP was the culprit behind the erosion. Personal consumption increased only 1%, which was half of expectations. Although GDP for the previous month was revised upwards to 4.5% from 3.9%, judging from the disappointing weekly Redbook retail sales reports for the month of July, consumers are still keeping a tight grasp on their dollars. Of course, higher oil prices have reduced the discretional spending power of consumers and if consumers aren’t holding up the recovery, then we have a huge problem at hand. Fed fund futures tell us that the market still expects another 75bp of tightening by year-end. The University of Michigan consumer sentiment index was slightly stronger than expected, but the report tells us that the relationship between confidence and spending has fallen apart in the past month. As we mentioned earlier, the strong Chicago PMI report saved the dollar this morning. New orders are increasing and so is the backlog – the index of backlogs increased to the highest level since July 1994. This may be promising for next week’s ISM report. However, it is important to point out that the employment index fell to 45.6, the lowest level in a year – more cause for concern. The biggest event next week is the US non-farm payrolls report.


    It is a big week for the UK next week, as we have a heavy economic calendar that includes industrial production, GDP estimate, manufacturing sector PMI and the Bank of England rate decision. As we mentioned yesterday, recent economic data gives the BoE no choice but to hike rates again. The market is already discounting a 25bp rate hike next Thursday. This forecast is supported by the National Institute for Economic and Social Research’s, warning that UK house prices are 30 per cent above their equilibrium level, and that measured tightening of monetary policy may not be enough to keep inflation under control. The Institute went on to say that there is even a strong case for the Bank of England to raise rates by 50 basis points next month.


    Finally a day of recuperation for the battered Japanese yen. Interestingly, the large number of economic data released last night was not the catalyst for the move higher – especially since household spending and housing starts declined. CPI did increase marginally, but primarily as a result of one-off factors such as higher oil prices. Instead, the yen piggybacked the gains in the Nikkei, which increased 1.88% overnight. This rally was triggered by a rival bid from Sumitomo Mitsui Financial for UFJ, which already was already entertaining a bid from the Mitsubishi Tokyo Financial Group.


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