Tuesday August 10, 2004 - 11:10:07 GMT
Share This Story
DailyFX.com - www.dailyfx.com
US OPEN MARKET POINTS 08-10-04
All eyes on the Fed meeting today, as most market players expect a 25bp rate hike despite Friday’s markedly weaker NFP number. The Fed has little choice in the matter as it must now save face after Chairman Greenspan’s mistakenly upbeat Humphrey Hawkins testimony several weeks back. If the Fed were to leave rates unchanged, it could precipitate another 150 point plunge in the dollar as traders would panic that US economy was tipping into a recession. Although the Fed will most likely stick to the script of ”economy remains fundamentally strong”, traders will scrutinize its statement on employment to see if the wording “labor markets have improved” remains in place. Overall, the Fed must play a very delicate game with the market. In light of the fact that its own highly optimistic assessment of the economy contrasts starkly with the reality of recent economic data, the Fed must restore its credibility and yet convince the market that the US growth is maintaining pace. Given Chairman Greenspan’s mastery of straddling any issue we have no doubt in the Fed’s ability to achieve this task.
Yet a more fundamental question remains. If 25bp hike is a given -- what will be its effect on the US economy? Here we disagree with many of our peers and argue that the aftermath of this decision could be far more brutal than most analysts expect. Although a 25bp rise seems small in absolute numbers, placed in the context of the current base rate of 1.25% it represents a full 20% increase in cost of funds. With the US economy extremely leveraged to the yield curve and highly depended on cheap financing (think interest-only mortgages, 0% car loans, etc.) even a small bump in rates could have chilling effects on economic activity. Thus while the market may bid dollars in the aftermath of the Fed hike, the longer term implications may be much more bearish. If US growth slows as the result of this move, there may be no further rate hikes this year leaving the dollar highly vulnerable both on fundamentals and on interest rate differential basis.
Key Overnight Developments
- JPY Consumer Confidence improves markedly 48.7 vs. 45.5 expected lending credence to strength of recovery
- GBP Trade Balance worsens –4.97bn vs. –4.5bn expected as Non-EU exports grow
- EUR In contrast DEM Trade Balance better €14.7b vs. €14.3b expected but export growth drop severely
FX Spot Overnight
- EUR trading 2270-2285 static as it awaits FOMC
- JPY ignores good CC data as oil dominates pricing with cross moving close to 110.80-111
- GBP loses 8400 off bad Trade Balance data but stabilizes at 8360
- CHF trades 2530-2545 range for 10 hours – record in inertia?
12:15GMT – (8:15 AM EST) CAD Housing Starts (July) Expected at 234.0K, Previous 239.3K
12:30GMT – (8:30 AM EST) CAD New Housing Price Index (June) Expected at 0.5%, Previous 0.8%
12:30GMT – (8:30 AM EST) USD Non-Farm Production (Q2 Prelim) Expected at 2.0%, Previous 3.8%
18:15GMT – (2:15 PM EST) USD FOMC Rate Decision Expected at 1.50%, Previous 1.25%
Forex Trading News
Daily Forex Market News
Forex news reports can be found on the forex research
headlines page below. Here you will find real-time forex market news reports
provided by respected contributors of currency trading information. Daily forex
market news, weekly forex research and monthly forex news features can be found
Real-time forex market news reports and features providing
other currency trading information can be accessed by clicking on any of the
headlines below. At the top of the forex blog page you will find the latest
forex trading information. Scroll down the page if you are looking for less
recent currency trading information. Scroll to the bottom of fx blog headlines
and click on the link for past reports on forex. Currency world news reports
from previous years can be found on the left sidebar under "FX Archives."