Tuesday August 31, 2004 - 21:30:54 GMT
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Dollar Tumbles On Weaker Confidence and Chicago Manufacturing Activity
DailyFX Forex Fundamentals 08-31-04
By Kathy Lien, Chief Strategist of www.dailyfx.com
·Dollar Tumbles On Weaker Confidence and Chicago Manufacturing Activity
·Only 2% Of UK Retailers Report Higher Sales According to CBI Survey
·Yen Pressured On Weaker Japanese Industrial Production and Sentiment Among Small Businesses
The euro finally managed to deliver an interesting trading day as fundamentals begin to shift. More specifically, the Eurozone delivered better than expected economic data, while data from the US continues to disappoint. In France, the number of people filing for unemployment benefits fell 10,000 during the month of July, bringing the unemployment rate down from 9.9% to 9.8%. This will certainly be positive for consumer consumption. The rebound in France, the second largest country in the Eurozone has been slightly more impressive than the rebound in Germany. Meanwhile, workers in Italy also enjoyed stronger than expected wages. The flash estimate of consumer price inflation in the Eurozone was unchanged at 2.3%, which was slightly softer than expectations. In the US on the other hand, both the Chicago Purchasing Manager’s Index and the Conference Board’s consumer confidence survey reported disappointing results. Manufacturing activity slowed from 64.7 to 57.3, while confidence declined for the first time since February. It will be interesting to see if the manufacturing sectors in Italy, France and Germany follow suit.
The dollar tumbled against the majors as the US economy reverts to the now all too familiar trend of slower growth. The expansion in Chicago’s manufacturing sector slowed in the month of August, just like it did in the Philadelphia region, which certainly has played a role in today’s falling US consumer confidence report. Last week, the dollar found some respite from the correction in oil prices, but with the percentage decline in oil prices decreasing, its translational benefits for the greenback is also evaporating. As we indicated yesterday, the market will began to secure its positioning ahead of the non-farm payrolls report after today’s US data. However, we do want to caution against any aggressive positioning before tomorrow’s manufacturing sector ISM report. Although the employment component of the Philly Fed survey decreased in August, the employment component of the Chicago PMI survey increased from 45.6 to 51.1, which means that companies are once again hiring instead of firing. We will look to the nationwide ISM report to see which trend is predominant, although the consensus is for a continuation of slower hiring. 150k is still an overly optimistic target and we do not see enough justification for such a strong rebound. We will elaborate further on our NFP views, as we get closer to the release of the report.
The biggest talk in the market during the European trading session was the decoupling between the euro and the pound. However, the positive relationship resumed its normal course following the release of the US numbers. The initial decoupling occurred because of the discrepancy between the data released from the UK and Europe this morning. As mentioned in our euro commentary, today’s data was euro positive. In contrast, the data from the UK confirms the Bank of England’s successful efforts in slowing the housing market and the general economy. Net mortgage lending fell from an upwardly revised GBP9.3 billion to GBP8.6 billion. Although net consumer credit beat expectations, the amount of credit extended is a contraction from the previous month. After five rate hikes, prospective homeowners are finally slowing house purchases. Meanwhile, the CBI retail sales survey fell from +24 to +2 in August, which means that only 2% of retailers surveyed reported rising sales this month. The CBI attributed the decrease to poor weather, but this is the lowest level we have seen in the index since March 2003.
Although Japanese growth is still impressive, we are beginning to see signs of slowing. Given the concerted efforts by the Chinese government to slow their economy and the damaging effects of higher oil prices, it is reasonable to see this slowing spillover onto Japan’s economy. Industrial production was flat in the month of July, after falling –1.3% in June. The market had actually expected activity in the manufacturing sector to rebound by 1.0%. Earnings decreased –0.4% in the same month, bringing the annualized rate down to 4.5%. Small business confidence dipped below 50 to 49.9, indicating that a larger number of small corporations are pessimistic rather than optimistic due to rising inventories and falling profits. However, despite the weaker data, we caution against joining the yen bear bandwagon prematurely. Although the industrial production report was weak, the government is optimistic and indicates that demand in the automobile and electronics sectors should firm in the coming months. Also, not all data released was weak. Construction orders increased for the second consecutive month while housing starts increased for the first time in two months.
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