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Dollar's Turn to Fail
Monday, 27 June 2005 04:26:31 GMT  |  Boris Schlossberg Senior Currency Analyst
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$ Dollar’s Turn To Fail
€ Back To The Drawing Board
¥ The 110 Barrier
₤ King Confuses All
₣ Rally Already!






US Dollar







"We do not see any factors at this point to stop monetary tightening. It's appropriate to raise rates at a measured pace, although we can't say to what level."
Gary Stern, president of Minneapolis Federal Reserve Bank.Monday, June 20, 2005 09:43 GMT

Dollar’s Turn to Fail

As usual, Friday action made the week. The greenback finally broke the 1.2000 barrier, but the move which occurred during the thin Tokyo session was so quick, that euro bears barely has time to cover their shorts before the unit popped back up.Instead of our usual punditry, this week we offer the following two charts which clearly point to a slowdown in US Industrial demand. Under such circumstances, it is very difficult to imagine a continuation of the tightening monetary policy from the Fed. If we are indeed correct and market sentiment begins to price in the end of the tightening cycle, focus will shift from selling euro’s to selling dollars, as the central reason for dollar strength will disappear. 




"A lasting slipping of the euro versus the dollar is therefore not part of the expectations."
Otmar Issing, Chief Economist, ECBWednesday, June 22, 2005 09:12 GMT


Back to the Drawing Board

With The Swedish Central Bank lowering short term rates by 50bp and the MPC meeting notes containing a surprisingly dovish tone, the specter of rate cuts hung over the euro for the better part of the week, pressuring the currency downward. ECB officials, however, adamantly denied any possible lowering of rates and with oil at $60/bbl it is easy to understand why. With euro at yearly lows, oil is now approaching the psychologically important 50 euros per barrel level which is the single greatest reason for ECB to maintain its hawkish bias.  Meanwhile, the best that could be said about European economy is that it stopped becoming worse. Undoubtedly, the Italian economic indicators, including consumer confidence, continued to deteriorate, but the far more important German data showed a flicker of hope. Most notably, preliminary unemployment data suggested that for the first time in 3 months joblessness will actually improve albeit modestly, as German companies have ceased layoffs for the time being. Europeans will now have to tackle the difficult task of reform, but with the euro fully 11% lower now than at the start of the year, the export driven region should finally see some pick up in demand which in turn should provide support for the currency.
Politics aside however, the lower euro may already have a positive effect on EU economy as Friday’s IP numbers registered a gain of 0.6% against expectations of only 0.1%. Next week we’ll see if the ZEW survey reports a note of optimism.





"The Japanese economy is expected to move out of the current soft patch and move towards a sustained growth path.... and the consumer price index is expected to register a year-on-year increase on average in the year to March 2007. Assuming that this outlook is realized, the possibility of altering the quantitative monetary easing policy may strengthen gradually towards the end of the year to March 2007."
Toshiro Muto, Bank of Japan Deputy Governor.Thursday, June 23, 2005 08:39 GMT


The 110 Barrier

Given oil’s stubborn perch at $60/bbl it is remarkable that the yen has not weakened further. The price action is a testament to Japan’s remarkable ability to adapt to highly rising energy input costs in a nation that imports 99.5% of its crude. The higher import costs certainly had their effect on Japan’s Merchandise Trade Balance which reported weaker that expected 296 Billion yen against projections of 499 Billion yen. But this week also highlighted the country’s gradual transformation from a dominant industrial power to a more services oriented economy. Services now comprise 60% of the country’s GDP and to that end the rise in Tertiary Index to 1.8% from 1.5% expected was welcome news to yen bulls looking for validation that Japan’s economy has finally turned the corner.  Still, as we pointed out in earlier commentary, yen will not gain traction until broad dollar weakness once more takes hold in the market. The 110 barrier remains the line in the sand between yen bulls and bears, but even if it is broken, it may simply set up a “bull trap” for dollar longs, unless Japanese economic situation suddenly deteriorates or US data shows material improvement.






 "The MPC tries to make monetary policy predictable not by giving hidden signals and subtle clues in speeches -- including this one -- as to where interest rates will go next, but by explaining our interpretation of the data. We do not make up our mind about interest rates before the policy meeting takes place, and we do so only in the light of an appraisal of all the information available then."
Mervyn King, Bank of England Governor Thursday, June 23, 2005 08:33 GMT



King Confuses All

The shock of the week for the pound came from a surprisingly dovish MPC meeting notes which reported that the committee had voted for a 7-2 in favor of keeping rates steady. The market had expected a straight 9-0 vote and the mere hint of rate cuts send the pound tumbling more than 150 points in a matter of several hours. But as we had pointed out the meeting took place before crude’s meteoric rise to $60/bbl and one of the two votes for the rate cut belonged to the long time MPC dove Marian Bell who steps down from her post at the end of this month. BOE Governor Mervyn King, then took center stage the day following and thoroughly confused the market by suggesting that rates may rise as easily as they fall depending on the economic data and the pound then recovered ground for rest of the week.Despite the turmoil, cable appears to have found key support at the 1.8000 big figure and while it certainly can test and break that barrier once more, the majority of the downside move appears to be exhausted. UK eco data paints a muddle through picture of relatively steady economic demand and it is reasonable to speculate that sterling may try to retrace back the 1.8500 level as fears of immediate rate cuts dissipate.



Rally Already!
 
Watching Swissie trading this week must have been thoroughly frustrating for CHF bulls. While the golden metal continued its steady climb, the franc lost more ground to the dollar albeit at a slower pace. The recent separation of gold and franc price movements is partly a function of the fact that the market is worried about the spillover effect on the Swiss economy from recent EU troubles. Undoubtedly the Swiss economy has seen a slowdown as evidenced by SNB’s downward adjustment in their GDP projection to 1.0% from 1.5%. Yet, both the country’s economy and its Balance Sheet remains far healthier than either its huge next door neighbor or big trading partner across the pond.


The strength in gold is likely to be expressed in the strength of the Swiss franc sooner rather than later and as such it remains an interesting relative value against both the greenback and the euro





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