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Thursday September 9, 2004 - 21:01:26 GMT -

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Pound Slides As Becomes Net Oil Importer For The First Time In 13 Years

DailyFX Fundamentals 09-09-04

By Kathy Lien, Chief Strategist of

·US Jobless Claims Improve After Hurricane Charley Related Surge
·UK Becomes Net Oil Importer For The First Time In 13 Years
·BoJ Governor Fukui Says “Long Distance (To Go) Before…End To Quantitative Easing”


The euro moved higher today as the ECB’s monthly report reaffirmed Trichet’s rosy medium term outlook and the need for “strong vigilance” to ensure that inflation remains stable over the near term. The monthly bulletin indicated that in addition to the rise in oil prices, the brisk increase in house prices will also require monitoring. The prospects remain favorable over the near term and indicate that the central bank is cautiously hawkish. The Kiel Institute upgraded its forecasts for Eurozone growth from 1.8% to 1.9% but lowered its forecasts for 2005 growth from 2% to 1.9% on the expectation that global growth will slow. Meanwhile, Italian industrial orders decreased on a monthly basis for the second consecutive month but surged on an annualized basis while the German trade balance narrowed unexpectedly. Both of these surprises were a result of increasing domestic demand for Italy and imports for Germany. This is definitely positive for a region whose growth has till now been predominately dependent on foreign demand.


The dollar failed to rally despite a much stronger than expected jobless claims report. Claims fell to 319k for the week ending September 4th from 362k. Aside from the outlier dip early July to 309k, jobless claims have not been at these levels since November 2000. The market has discounted the improvement because of the high possibility of distortions related to hurricanes and Labor Day. This dip follows 2 weeks of elevated claims from Hurricane Charley. The dollar’s lack or reaction comes from the general belief that claims will jump once again this week on the aftermath of Hurricane Frances. The weather disruptions have made it difficult to use claims as an accurate gauge of the overall labor market trend. A survey released today indicates that US health premiums increased 11% in 2004. This sheds some light on the slow pickup in hiring that we have being seeing lately. Benefit costs have been growing, which makes it more difficult for firms to hire aggressively. Import prices surged 1.7% last month driven primarily by the rise in petroleum prices. The key release tomorrow is the US’ trade balance for the month of July. The balance is expected to narrow after reaching a record $55.8 billion in the month of July.


Dual forces pressured the pound today. The UK’s trade balance widened in the month of July as the country became a net oil importer for the first time in almost 13 years. Twenty five percent of the UK’s oil exports use to come from the North Sea, but with declining oil production, it now accounts for only 8% of exports. This means that the rise in oil prices has become a net cost for UK corporations, instead of the net benefit that the market had initially anticipated, providing a further reason for bears to sell the pound. Additionally, this morning, the Bank of England kept its repo rate unchanged at 4.75%. This move was generally expected following recently weak housing market, retail sales, industrial production and manufacturing sector data. After having increased interest rates by 125bp since last November, the economy is finally cooling. Both house prices and mortgage approvals are declining. Recent retail sales data also indicates that consumers are cutting back spending while inflation provides no immediate threat. Last month, in the press conference following their quarterly inflation forecasts, BoE Governor King said that, "consumption will continue to decelerate in the wake of moderate income growth and a weaker housing market." The central bank believes that house price inflation has now "peaked" and they expect "further moderation" going forward. The market is currently pricing in another rate hike this year, but the BoE is clearly indicating that there is no urgency to raise rates.


As expected, the Bank of Japan unanimously decided to keep monetary policy unchanged, maintaining financial sector liquidity stable in the 30 to 35 trillion yen range. Despite increasingly positive data, the Bank's policy board maintained an effective zero interest rate in a continuing effort to ward off deflation. BoJ Governor Fukui said that, "there is a long distance (to go) before the BoJ will have a chance to end the quantitative easing" and reiterated their goal to keep monetary policy easy until the government sees annualized CPI stabilize above zero. Fukui sees a continued economic recovery, although household incomes have yet to benefit from the rise in corporate profits. The Bank however, warns about the possible negative effects of higher oil prices on the domestic recovery. Meanwhile, weak machinery orders sent stocks lower.


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