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Thursday September 16, 2004 - 20:05:49 GMT -

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Pound Soars One Percent As Consumers Continue To Spend

DailyFX Fundamentals 09-16-04

By Kathy Lien, Chief Strategist of

· Mixed US Data Provides No Case For Excitement
· Swiss National Bank Raises Rates By Quarter Point
· Pound Soars One Percent As Consumers Continue To Spend


Today could have been an exciting day for the euro, but the mixed batch of US data and generally in line US numbers has led to another rather uninteresting trading session. The euro did rally modestly following the Philadelphia Fed Survey and comments from Fed Governor Gramlich, but the 50-pip rally was nothing to get too excited about since range trading is still the predominant theme. This means that we will see nothing more than continued consolidation leading into the FOMC rate decision next week. As for today’s data, it simply clarifies the slower growth going forward. Inflation is softening, activity in the manufacturing sector is mixed while the labor market is improving. Headline CPI was unchanged at 0.1% in the month of August, while core CPI grew by a less than expected 0.1%. Softening inflation pressures remain an uncertainty that weighs on the Fed’s interest rate cycle. According to the Treasury International Capital flow data, foreigners increased their total holdings of US assets by $64 billion in July, which is slower than the $74 billion in June. However, it is sufficient enough on a monthly basis to cover the $1.8 billion per day inflow that the US needs to attract to keep the dollar from falling. This means that for the time being, the record current account deficit is only a back burner concern. The true catalyst for today’s move was the sharply weaker Philly Fed survey. Although manufacturing activity in the Philadelphia region remained positive, it slowed for the third consecutive month. However, the components of the report paint a slightly different picture. Shipments took a sharp dive, but there were improvements on a number of different fronts including new orders, the number of employees and the average workweek. The employment component of the report confirms what we believe will be a gradual improvement in the labor market. Today’s improved jobless claims report also supports this case. As exciting as this may be, there is no clear directional bias in terms of growth, which could prompt many traders to stay neutral.


The Swiss National Bank raised rates for the second time this year by 25 basis points to a three-month target LIBOR rate of 0.25%-1.25% or a mid rate of 0.75%. The rate hike was for the most part priced into the market. The economy is gradually recovering and the SNB has previously indicated their intentions of normalizing rates. According to the central bank, “their interest rate increase is evidence of the SNB’s confidence in a continued upswing.” In their quarterly assessment, the SNB expects growth to be 2% this year with inflation averaging 0.7%. For the time being, inflation is not a primary concern. The central bank also expects private consumption to be a significant contributor to rebounding growth. However, the SNB intends to keep monetary policy “expansionary.” If the recovery continues and domestic consumption picks up, there will probably be another rate hike this year. However, the franc sold off despite the rate hike as the SNB did reiterate that they would “react appropriately” should the “Swiss franc appreciate markedly as a result of unexpected developments.”


The pound is the day’s best performer as we finally see some solidly positive data. Despite the slowdown in the economy, consumers are spending. Retail sales increased 0.6% in the month of August, compared to expectations for a -0.3% decline. This brings the annualized rate of retail sales to a whopping 6.5%. Consumer spending tends to be the biggest contributor to growth and previously there were reports that consumer spending may have slowed significantly. However, today’s data completely refutes this case and has sparked some renewed speculation of tightening. Although this is a fantastic number, shopping during the summer season is always more robust. After a complete dry spell of stronger data, it is easy to get excited. We caution against becoming too optimistic about future rate prospects as it would be too rash for the Bank of England to change their gradualist tone based upon one month of data.


Although Japanese leading indicators were revised downward from 66.7% to 60.0% in the month of July, the yen rallied against the dollar as the coincident index of current conditions improved from 77.8% to 80.0%. Overall though, the Japanese yen is still range trading. Conflicting comments from BoJ Governor Fukui and Ueda are particularly interesting. Fukui reiterated that the economy continues to recover and that the recovery should gather momentum. However the BoJ will continue to maintain its more accommodative monetary policy until inflation increases for some time. Ueda on the other hand talked about an exit policy for quantitative easing. He said that the economy will continue to grow, albeit at a slower pace.


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