US Dollar

"It is important that China move to a more flexible exchange rate regime, we have urged them to do so, and they have agreed that it is in their interest to adopt greater exchange rate flexibility. I believe that our long-standing efforts are beginning to come to fruition and we are making progress toward achieving this goal."
John Snow, US Treasury Secretary. Friday, July 1, 2005 10:46 GMT

King Dollar Rests on NFPs

We have been spectacularly wrong in our dollar dourness as the currency hit yearly highs against the euro, yen and cable by end of Friday trade. Last week dollar bulls truly ruled the roost by hitting the eco data trifecta – stronger than expected GDP (3.8% vs. 3.5%), hike in Fed funds to 3.25% and good ISM numbers (53.8 vs. 51.4). So are we properly chastised? Have we now turned dollar bullish? We would, save for this very interesting tidbit from the inimitable Alan Ableson in this week’s Barrons.

Mr, Abelson writes, that in examining the upward revision of the GDP, he noticed that the GDP implicit price deflator was revised downward to 2.89% from 3.16% - which caused GDP to be marked up from 3.5% to 3.8%. “OK?”, writes Mr. Ableson, ”What caused the big drop in inflation and hence the rise in GDP was …housing”  We kid you not.  Apparently, according to the BEA the single most bubbilicious component of the economy, was responsible for a decline in prices. Draw your own conclusions, but we remain convinced that risk in the EUR/USD remains to the downside, though traders should be cautious ahead of Friday’s NFPs which could trigger one final burst of dollar buying if they print north of 200K.


"It is impossible, it is irrational to come to Brussels and to go back to respective capitals saying every time 'we have won', as if it was a kind of boxing championship. People like that are destroying the very idea of Europe."
Jose Manuel Barroso, European Commission president.Friday, July 1, 2005 10:47 GMT

Slowly Turning Around

Overshadowed by all the dollar bullish news was the fact that European data was not half bad last week. Germans finally stopped firing workers as unemployment decreased by -23K from 0K expected and ILO rate declined to 9.3% from 9.6%. EZ Manufacturing PMI climbed almost to the 50 boom/bust level, printing 49.9 against 48.7 the period prior and IFO survey stabilized at 93.3. We continue to believe that beneficial effects of currency depreciation will manifest themselves in improving economic data for the EZ.

Next week, Retail Trade, Retail Sales and Factory Orders should all provide further evidence of EZ turnaround, but whether it will be enough to rally the unit will  depend as always on US data – most notably the NFPs.

Japanese Yen

"Basically the Japanese economy remains firm ... As the jobless rate is improving, brisk business activity is spreading through to the household sector. But oil prices remain high and I would like to study the result of the Tankan."
Sadakazu Tanigaki, Japan Finance Minister.Friday, July 1, 2005 10:03 GMT

Yen Bulls Scream “OUCH!”

“The only trap set in the USD/JPY over the past week,” we wrote in our Friday piece, ”has been for yen bulls who have been squeezed mercilessly as the pair has relentlessly ground higher taking out the 111.00 figure despite generally positive economic data from Japan.”

Yen broke through the 110 barrier, ignoring Japanese economic data as trading was strictly driven by carry trade speculative flows. Even a mid-week decline in oil prices did not spur any meaningful retrace. At 325bp interest rate differential the USD/JPY has become the preferred carry trade of the moment.  The burst upward has also been fueled by very favorable positioning, as our proprietary SSI index has consistently shown speculators trying to short the rally.  Only when positioning flips and everyone decides to hop on the dollar bandwagon will the pair see any meaningful correction.  It’s difficult to predict when that will happen, but we know this – parabolic rises always give way to vertical falls. We would no be surprised to see dealers, who have become progressively short as the rally continued, to pull the rug from underneath the dollar longs and manufacture a quick and vicious retrace. 

British Pound

"I do not envisage any progress on the stalled EU budget talks until the leaders' summit in December at the earliest."
Tony Blair, UK Prime Minister. Friday, June 10, 2005 15:48 GMT

Cable Craters

Interest convergence. It seems like a such neutral concept, yet few pound bulls would be so calm after experiencing last weeks 300 point plus dive after UK GDP was revised significantly lower (2.1% vs. 2.9%) and the market started to seriously price in an interest rate cut from BOE. Given the fact that the MPC  meets Wednesday and Thursday to announce any potential interest rate changes this week should be quite interesting for pound traders.

The market still expects the BOE to maintain rates at 4.75% but should the Monetary Policy Committee give in to unrelenting market pressure the spread between the greenback and sterling would narrow to a mere 125bp from 250bp at the beginning of this year.
It is difficult to say if the staunchly independent BOE will cave in to pressure, but with market psychology now decidedly pound bearish while the major support line of 1.8000 broken to bits, any rally in cable will likely encounter massive selling unless UKL data suddenly improves.

Swiss Frank

Kof Kills the Swissie

As Gold hit resistance once more at the $445 level and retraced some of the gains made in June, Swiss economic indicators weighed heavy on the franc. Most notably the KOF index of leading economic indicators – the most important economic statistic of the month – printed at an 18 month low slipping to .46 from a revised .49. Higher oil as well as depressed demand from Germany, Switzerland’s biggest trading partner are pinching Swiss growth. In addition, SNB this week lowered its projected growth rate from 1.5% to 1%, all of which pushed Swissie lower by 240 points by end of week.

Next week, the Swiss economic calendar is quiet with only the unemployment data due Thursday. The dollar remains in an unmistakable bull run against the franc but the rally is getting long in the tooth. Still it will most likely be US data which will determine if the party is over or if there is more upside to come.

Next week the unemployment figures which are expected to report unchanged may contribute to the notion of stability in the Swiss economy.

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