·
Dollar Shrugs off Strong TIC Report in ThinHoliday Trading
·
China Sees
Declining Purchases of US
Debt as a Solution to Reducing Surplus with US
·
Japanese
Officials Continue to Be Concerned With Rising Long Term
Yields
US Dollar - With volatility compressing
significantly last week, we took the opportunity on Good Friday to talk about
the important crossroad that we are standing at in many of the currency pairs
and how this week could prove to be a major turning point in the market. We also indicated that a break or a big move was
imminent and to our pleasant surprise this was exactly what unfolded when we
walked into the office today. With
most of Europe still closed for Easter Monday,
Japanese and US traders took
the opportunity the push the dollar lower against all of the majors. Trading was extremely erratic as
Japanese traders initiated
the first wave of dollar selling in the Asian trading hours as dollar bulls take
profit ahead of the US Treasury International Capital
(TIC) flow report. When US
traders joined the market, they were surprised to see the breakout and responded
by exacerbating the sell-off. What
we found the most interesting however was the market’s lackluster response to a
very strong TIC number. Net foreign
inflows to the US increased by a whopping $86.9
billion, to the highest level in 3 months. This was not only far above the same
month’s trade
deficit, but also far above the market’s forecast. The details of the report indicate that the US’ aggressive interest rate hikes
have attracted strong interest in the country’s bond market investments. OPEC, China and Japan were all buyers while hedge funds located
in the Caribbean were sellers for the third
consecutive month. Overall, this report was very strong and
will push back fears for a growing current account and trade deficit for the
time being since the number indicates that we are seeing funding
sufficiency rather than deficiencies.
Although technically, today’s break lower in the dollar appears significant
against most of the major currency pairs, the fact that the move happened during
thin trading conditions makes its sustainability questionable. Looking beyond the TIC report, dollar
bulls still have a cause for concern. The manufacturing sector continues to show
signs of weakness as the Empire State manufacturing index falls from 29.0
to 15.8 in April. This is the
lowest reading we have seen since last October and is consistent with the weaker
ISM report released two weeks ago.
Fears of a possible US
military action on Iran has pushed oil prices to a new
record high of $70.36 and gold prices to a 25 year high. The rapid rise in energy prices over the
past two months should raise concerns around the
world. Even though heating needs
are behind us, we are moving into the busy summer driving season. Gasoline prices have already creeped
above $3 a gallon in many states and if they continue to rise, it could pose a
bigger drag on growth as business costs increase and consumers end up with less
money for discretionary spending.
It will also push global inflation higher, leaving many central banks
with no other option than to either keep monetary policy tight or in some cases,
tighten them even further.
Though this could mean a more aggressive Fed, it ultimately means greater
risks to the economy. This week, we
are expecting inflation figures starting with tomorrow’s producer price
index. Given the sharp fall in the
February figures as well as the rise in energy prices, PPI should come in
stronger, which could help the dollar recuperate some of today’s losses.
Euro - Even though the Euro broke higher,
European markets were still closed for holiday
which means that it will be interesting to see how European traders will respond
to the breakouts
that we saw today. We are sure that
at bare minimum, the European Central Bank is
probably not very happy with the Euro’s rise. We are not far from the EUR/USD’s year
to date highs, which means that should we push above 1.2350, the next level of
major resistance will not be until 1.25, a level that we suspect is the ECB’s
pain threshold. Further gains would
threaten the region’s growth and recovery and force the ECB to be even more
nimble with interest rate hikes than they have already proven to be. Like the US, the most
anticipated pieces of data from the Eurozone this week are inflation
figures. As we mentioned Friday,
based upon the French and German consumer price figures that already have been
released, it seems that the annualized pace of inflation growth in March is
expected to slow modestly. Italy reported its own CPI numbers
this morning, which reflected a bit more acceleration in prices than
expected. Therefore any downticks in Eurozone CPI should be
mild.
British Pound - After consolidating for the past
three months, we have finally seen a meaningful breakout in the GBP/USD. Unlike the EUR/USD, the breakout is
cleaner and out of a tighter triangle consolidation, which means the possibility
of it holding is stronger. Merger
and acquisition news continues to fuel gains in the British pound. After Nasdaq’s announced stake in the
London Stock Exchange last week, there is now talk that the NYSE wants to take a
stake in the LSE as well. As we
have repeatedly said, increased protectionism measures in the
US have made the
UK’s business friendly
market more attractive to international investors. Continued interest
in UK based entities will spur further
gains in the pound even if the Bank of England continues to leave monetary
policy unchanged.
Japanese Yen - The
Japanese Yen rallied against
the US dollar but lost ground against the
other major currencies. The
Japanese government continues to be
concerned with the rise in long term rates and is showing no signs of backing
down on their intentions to keep their zero interest rate policy intact for a
while longer. Economic data
released out of Japan last night was mixed with a
fall in consumer confidence but mild upward revisions to industrial
production. This week’s focus will
be on Chinese President Hu’s visit to the US. We already heard from one Chinese policy
official that the solution to reducing the country’s large trade surplus with
the US may be through an
increase in imports as well as decreasing purchases of US
debt. The second point is probably
the most important as Hu may become even more convinced that this is the way to
go by Bill Gates, who has been a big dollar bear since January of last
year. On the President’s first
evening in the US, he will be
having dinner with Gates before making way to Washington to
meet President Bush.
