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Thursday August 19, 2004 - 10:14:40 GMT
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US OPEN MARKET POINTS 08-19-04

US OPEN MARKET POINTS 08-19-04
Published By: Boris Schlossberg, Fundamental Analyst

Positively British

Imagine this. You enjoy the second lowest unemployment in the industrialized world of only 4.8% while your Consumer Price Index figures actually DECREASE last month by –0.3%. In the past year your citizens earned solid, average wage increases of 4.4% while the amount of new vacancies in the job market increased by 12% on year/year basis. Your interest rates are fully 325bp and 275bp ABOVE your two closest rivals while the economy experiences 43rd straight quarter of growth. Sounds like a recipe for economic success and currency appreciation, right? So why is the pound being pounded like some emerging market paper on the verge of default? We exaggerate of course. Cable has sold off by only 2.5% from its most recent highs, yet to many frustrated sterling bulls watching the currency’s relative weakness against the dollar, yen and euro in the past two weeks certainly makes it feel that way.

Why has the GBP been so weak? The market believes that BOE is at the end of its interest rate rising cycle. Yesterday’s MPC meeting notes may have aggravated those fears by stating that BOE sees first signs of a slowdown in housing prices – which has been the primary driver for rate hikes. True, the latest RICS data showed a marked decline in the rate of house price increases with only 3% of homes seeing higher prices. Yet housing is not BOE’s sole concern. We agree with UBS, whose latest research states, “We believe risks are to the upside of this implied tightening profile. The MPC may have discussed no change this month, but it has made it clear that headline growth remains well above trend and its forecast of a GDP slowdown in 2005 is based on market rates in early August; said rates looked for a minimum rise of 50bp (from the current) BOE's base rate.”

What if BOE did not raise rates further? We still feel the pound presents strong relative value. Why? Currently cable enjoys a 275bp differential over the euro. With European growth still anemic, ECB has practically telegraphed no further hikes to the market for the foreseeable future essentially insuring that the spread remains in tact. The Fed has taken an opposite view and has embarked on a tightening policy. However, with 325bp differential to overcome we feel the Fed may tip US into a recession long before parity is achieved. In that case, differential compression will not matter. Bottom line -- UK is a better performing economy than either US or the Euro-zone with professionally managed fiscal and monetary policies that are far superior to those of its G-7 colleagues. Recent price weakness notwithstanding, the GBP should maintain its growth and yield advantage over its much bigger rivals offering interesting value to speculative longs.


Key Overnight Developments

- EUR PPI prints 0.6% three times larger than expected off oil and steel increases
- GBP All data more or less in line Retail Sales (-0.4% vs.-0.3%) PSNCR (-₤6.8Bn vs. -₤6.6Bn) as hikes start to effect

FX Spot Overnight

- EUR takes out 2360 resistance as USD bears grow
- JPY quiet trade below 110 as oil fears fade
- GBP tests 8200 and finds strong support snapping to 8270 on short covering
- CHF targets 2400 handle as EUR/USD gets stronger

Upcoming Events
12:30GMT – (8:30 AM EST) USD Initial Jobless Claims (August 14) Expected at 335K, Previous 333K
14:00GMT – (10:00 AM EST) USD LEI (July) Expected at –0.2%, Previous –0.2%
16:00GMT – (12:00 PM EST) USD Philly Fed (August) Expected at 30.5, Previous 36.1

 

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Amazing Trader EVENT RISK Calendar:

Fri 20 Oct
12:30 CA- Retail Sales & CPI
14:00 US- Existing Homes Sales


Tue 24 Oct
All Day flash PMIs
Wed 25 Oct
01:30 AU- CPI
08:00 DE- IFO Survey
08:30 GB- GDP
14:00 CA- BOC Decision
14:30 US- EIA Crude
Thu 26 Oct
11:45 EZ- ECB Decision
12:30 US- Weekly Jobless
14:00 US- Pending Homes Sales
Fri 27 Oct
12:30 US- GDP
14:00 US- final Univ of Michigan

Forex Trading Outlook


Potential Trading Opportunities


  • POTENTIAL PRICE RISK: High Fri-- 12:30 GMT CA- Retail Sales and CPI. Top economic indicators.


  • POTENTIAL PRICE RISK: HIGH Fri-- 14:00 GMT US- Existing Homes Sales. Top Housing statistic.



John M. Bland, MBA
co-founding Partner, Global-View.com

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