Monday August 2, 2004 - 20:20:28 GMT
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Dollar Erases Terror Losses on Stronger ISM
DailyFX Forex Fundamentals 08-02-04
By Kathy Lien, Chief Strategist of www.dailyfx.com
· Foreign Demand Helps To Expand European Manufacturing Sector
· Ninth Consecutive Month of Expansion in US Manufacturing
· Cabinet Office To Keep Economic Assessment Unchanged
Aside from the looming terror threats, the market’s primary focus this morning is on the manufacturing sector in the US and Europe. The Eurozone reported the eleventh consecutive month of expansion in the manufacturing sector data, lifted by unwavering export demand. Despite weaker domestic demand, foreign demand has helped to maintain momentum in Germany and Italy. France on the other hand was the laggard, with the PMI index falling from 55.8 to 54.6. Across the board declines were reported, more specifically in the new orders, output and employment components in France. However, for Germany and Italy, this is a rebound from a drop in June while in France, this is a drop after an increase in June. The fall in the euro during the month of July is without doubt a factor that contributed to the improved performance. Tomorrow, we are expecting labor market and inflation data from the Eurozone. Both the unemployment rate and the annualized rate of producer price inflation are expected to remain unchanged. The euro is right now at a very critical level, and whether the single currency rebounds from here or continues its slide below 1.20 will be contingent upon developments in the US, inclusive of terror.
Although the US dollar has rebounded quite a bit from its earlier losses, the Swiss franc, with its commonly known “safe haven” status, has benefited from the heightened terror alerts. Not known to many, the Swiss franc’s unique status dates back to when the country use to have a mandate requiring the currency to be backed up to 40% by gold reserves. That rule has since now dissolved. Now it’s the country’s political neutrality and bank secrecy laws that have made the country and its currency an ultimate destination for global investors to seek refuge during times of geopolitical uncertainty. Meanwhile, this morning, the US reported a dip in construction spending (related to poor weather) and an increase in the Institute of Supply Management’s factory index, which rose from 61.1 to 62.0. The index has been above 60 for the ninth consecutive month, a reading above 50 indicates expansionary conditions. The prices paid component declined from 81 in June to 77.0. The report confirms the health of the manufacturing sector while reporting lessened inflation pressures. However, it is important to point out that the employment component decreased for the second consecutive month, which could weigh on Friday’s non-farm payrolls report.
The British pound soared as the manufacturing sector grew by the fastest pace in 10 years according to the Chartered Institute of Purchasing and Supply survey. According to the CIPS, “despite rising costs, firms stepped up their purchase of raw materials to meet increasing demand and guard against future supply shortages." Today’s report on manufacturing activity will certainly increase the central bank’s concern with the lack of spare capacity. With house prices showing no signs of easing, the think tank National Institute of Economic and Social Research in London warned that a 50bp rate hike would be needed to prevent a crash in the housing market. They believe that the housing market may be as much as 30% overvalued. Bloomberg reports that according to a survey conducted last week, only one out of 40 economists polled expect a 50bp rate hike on Thursday.
Back to business in USDJPY, as the pair resumes its downtrend. To no one’s surprise, the Ministry of Finance announced that they have not intervened in the currency markets for the fourth consecutive month. The Nihon Keizai Shimbun reports that the Cabinet Office will be keeping their outlook on the Japanese economy unchanged for the month of July. They are closely watching consumer spending, which fell 3.5% mom and 1.3% yoy during the month of June. Also possibly raising concerns about the future of consumer spending was the weaker than expected report on wage growth. The report indicated that wages including bonuses declined by an annualized rate of 2
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