Friday August 20, 2004 - 16:45:20 GMT
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Lack Of Data In Beginning of Week Should Keep Dollar Ranges Intact
DailyFX Forex Fundamentals 08-20-04
By Kathy Lien, Chief Strategist of www.dailyfx.com
· Lack Of Data In Beginning of Week Should Keep Ranges Intact
· Eurozone Current Account Surplus Becomes Deficit
· Fed Custody Holdings Increase For Fifth Consecutive Month
The dollar strengthened against the euro in lifeless trading throughout the London and US trading session. There is no need to scour the wires looking for a rationale to explain the dollar’s strength because the greenback is simply coming off extremely oversold conditions against the euro. No news is good news for the dollar, since there is then no compelling reason for the EURUSD to break out of its current range. As surprising as it may be, there are still many traders that are hanging onto the hope that the US economic recovery will regain strength in the months to come. The market has been spoiled by a few months of good data and like our experiences during the technology boom, no one wanted to believe that it was over, till it was really over. As a result, the lack of significant US economic data until Wednesday of next week will encourage optimists to step in once again and put a bit of downward pressure on the euro. Meanwhile, there were three pieces of economic data released from the Eurozone this morning – French GDP, French current account and Eurozone trade data. France’s Q2 GDP was confirmed at 0.8%, while the current account deficit narrowed from –EUR729M to –EUR512M in June. The Eurozone’s trade surplus narrowed from EUR7799M to EUR8710M, while the current account surplus became a deficit of -EUR500M in the same month. The most important release next week from the Eurozone is the German IFO Survey of Business sentiment due out on Thursday.
Providing some sort of modest boost for the dollar was the Federal Reserve’s Custody Holding data. The report indicated that the Fed’s holdings for foreign central banks increased by $9.2bln in the week ending August 18th. This is the fifth consecutive monthly rise, bringing total holdings above $40bln. Although the deficits in the US are still a significant concern, this week’s custody data and Monday’s Treasury International Capital flow data suggests that we may not have to worry about a current account financing crisis quite yet. US data next week is back-loaded, meaning that we nothing of significance due out on Monday and Tuesday, but between Wednesday and Friday, we have a very busy economic calendar. We are expecting durable goods, the help wanted index, Q2 preliminary GDP, personal consumption and the University of Michigan consumer confidence survey. There is a high risk that GDP may be revised lower on Friday from 3.0% to 2.8%, which would certainly be very dollar negative. As for Switzerland, the trade balance and money supply were released this morning. Switzerland posted its 18th consecutive trade surplus, boosted by an increase in exports. Money supply growth slowed from 3.7% to 2.2%.
The British pound gave back everything it gained yesterday, as range trading remains the predominant theme against the dollar. As a result, we have to turn to EURGBP to get more clarity on the health of the pound. Against the euro, the pound has fallen approximately 100 pips since Monday. Diverging monetary policies should have helped rally EURGBP, but most of the market has a very short-term memory, which means that it is more focused on the current reports of slowing growth and house price acceleration rather than the fact that the Bank of England is still predicted to raise rates one to two more times this year, while the European Central Bank stands pat. Next week, we are also primarily back loaded in terms of UK data. The most important releases from the UK are the second release of Q2 GDP and the Gfk consumer confidence survey, both of which are due out on Friday. So far, sentiment in the UK has been negative for six consecutive months. There is no reason for a divergence from the current trend.
The yen has strengthened against the dollar for the eighth consecutive trading session today, falling a total of 2% for the entire week. Today’s extended gains were helped by a stronger than expected tertiary industry index, which reported increasing activity in the month of June. The price action in the yen is particularly interesting because the correlation between the Japanese yen and oil has broken down completely this week. Oil is slowing creeping towards $50/barrel, while the yen continues to strengthen. The price action in USDJPY this week and the divergence with oil is most likely reflective of changes in positioning. The COT report for the week ending August 10th indicates that speculators increased their long USDJPY positions. We bet this week’s price action is indicative of some of these positions getting stopped out. In the week ahead, there is a lot of significant Japanese economic data, including trade data, the jobless rate, worker’s spending and inflation.
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