Tuesday May 11, 2004 - 21:54:15 GMT
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Cable Sharply Lower on Poor UK Manufacturing Data
EURUSD tested and failed at the 1.1900 level early in London trading before coming off as French industrial production in March fell short of estimates. While the February reading was revised higher to 1.2%, the current 0.1% m-o-m increase disappointed a market that was looking for 0.5%. The dollar continued to strengthen intraday before reversing back towards 1.1880, as OECD forecasts revised down growth in the Euro area to 1.6% from an earlier 1.8% estimate. In contrast, the OECD estimated the wealthier world economies to grow by a collective 3.4% in 2004, up from its November forecast of 3%. Given solid US growth, the Paris-based think tank advised the Fed to tighten monetary policy sooner rather than later, advocating a summertime rate hike. For the ECB, the OECD’s policy prescription was to ease monetary policy by as much as 50 basis points, taking out an insurance policy of sorts on lagging European growth.
USDCHF stalled at the 1.3080 level just prior to the US open and proceeded to grind lower intraday, slipping through 1.3000 to close around 1.2975. Both Philadelphia Fed President Santomero and Chicago Fed President Moskow commented today on the US economic outlook—while the latter noted that solid economic growth and labor market gains are likely to continue, both reiterated the current low levels of inflation supporting the Fed’s “measured” stance on raising rates. The dollar looked to have sold off on the back of Moskow’s comments, with USDCHF touching an intraday low of 1.2962 by early afternoon. A circulating CSFB report calling for 50 basis points worth of rate hikes by the SNB this year also supported the Swissie. Outside of monetary policy expectations, CHF still appears to be a safe-haven play given turmoil in Iraq and new images emerging from both the prisoner scandal and apparent decapitation of an American hostage. In light of this, the market seems content to bid CHF higher, and little focused on Iraqi insurgent al Sadr’s purported truce offer.
Surprisingly poor UK data sent cable off a cliff in London trading, with the pair falling over 200-pips to a five-month low before the US open. Starkly contradicting upbeat purchasing manager surveys, industrial production was unchanged in March, versus expectations of 0.6%. Also below consensus, manufacturing output fell by 0.3%, on expectations of 0.5%. After a 0.5% decline in February output, this second disappointment could affect market expectations of additional Bank of England tightening. During the New York session, cable attempted to break 1.7600 before drifting lower to settle around 1.7550. Since recording its yearly high on February 18, cable has fallen over 1500 pips. Polls showing UK voter support for PM Blair’s Labour Party at 17-year lows could add to further negative GBP sentiment, pushing cable toward 1.74 and below. Tomorrow the market will focus on the Bank’s Quarterly Inflation Report for policy clues.
USDJPY tried and failed to grasp the 114 handle after trading above the level Monday, moving lower during the New York session to close around 113.15. The yen received some support from the Nikkei, which managed to close higher after its nearly 5% meltdown on Monday. Tuesday Japanese data was mixed, with leading indicators coming in on target but household spending falling by more than expected. Still, the yen strengthened on hopes that the slide in Japanese equities is over. At these USD/JPY levels, Japanese exporters may continue to emerge as dollar sellers, hoping to lock in gains above hedge targets anecdotally thought to be around 105 for the new fiscal year. In official comments, Finance Minister Tanigaki noted that while the broader trend in the FX market appears calmer, authorities are monitoring both stock and equity markets closely.
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