Wednesday August 4, 2004 - 19:52:44 GMT
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Rising oil prices take another toll on the Japanese yen
DailyFX Forex Fundamentals 08-04-04
By Kathy Lien, Chief Strategist at www.dailyfx.com
·Dollar tanks as employment component of service sector ISM declines
·Weakest UK Service Sector PMI in 10 Months
·Rising oil prices take another toll on the Japanese yen
The dip below 1.20 in the euro today was relatively short-lived. Given the pair’s rapid 30 pip drop in approximately 2 minutes, the price action suggests that the pair broke the inevitable support, triggered a number of stop orders and failed to find sufficient momentum to continue its move lower, so instead, it rallied right back to where it opened. As we have previously stressed, the recent movements in the euro appear to be driven primarily by positioning. Further elaborating on our point yesterday, the most recent slide in the euro began on July 19th. Coincidently, according to the CFTC, non-commercial net long positioning in the euro reached its highest level in over a year in the week ending July 13th and July 20th. The net long positioning reached a high of 36,101. In the week that followed, which also corresponded with the sharp slide in the euro, net long positioning decreased by 50%. The decrease came purely as a result of a fall in euro longs and respective decline in open interest, which only says one thing – that the longs were stopped out. Meanwhile, Eurozone service sector PMI reports were mixed – Germany improved, while France worsened. This same trend was seen in the manufacturing sector PMI reports released on Monday. German unemployment unfortunately increased to an 11-month high of 10.6% from 10.5%, which raises concerns that the weak labor market will keep consumer spending depressed. Interest rates are expected to remain unchanged at 2% following the ECB monetary policy meeting tomorrow.
The dollar failed to rally despite a better than expected service sector ISM report and factory orders. The primarily reason is because the underlying details of the ISM report were not as encouraging. More specifically, the employment component of the report fell from 57.4 in June to 50 in July, while the prices paid component declined from 74.6 to 73.1. 50 is the critical expansion/contraction point – therefore having the employment component at 50 suggests that just as many firms are firing as they are hiring. The prices paid data suggests softening inflation pressures – all the more reason for the Fed to raise rates by a boring 25bp next Tuesday and keep the bulk of their statement intact, leaving in the word “measured” and warning that inflationary pressures remain low. However, overall the service sector appears to be humming along. The manufacturing sector is also performing well, since the stronger factory orders report comes on the heels of Monday’s robust manufacturing ISM report.
In complete contrast to the manufacturing sector, the Chartered Institute of Purchasing and Supply survey reported that the service sector grew by the slowest pace in 10 months. If you recall, according to the data released by the same agency on Monday, the UK’s manufacturing sector grew by the fastest pace in 10 years. This is the third consecutive month that the service sector has slowed, with the most significant declines in the business expectations component. This report, though disappointing, should not deter the Bank of England from raising rates by 25bp tomorrow morning to 4.75%, especially since the employment component improved. The labor market remains very tight with the unemployment rate at a 29-year low.
The renewed rally in oil prices has prevented the yen from registering more gains against the dollar overnight. As one of the world’s largest net oil importers, Japan has much to lose with rising oil prices. The Nihon Keizai Shimbun has an article today that analyzes whether the Bank of Japan would remove their accommodative monetary policy in light of the persistent rally in crude. However, inflation still remains relatively tame in Japan and even though BoJ Governor Fukui has warned that he is closely watching oil prices and its impact on economic growth, Japan’s consumer price index increased only marginally in June. Raising rates still remains a remote possibility.
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