Articles from January 2005

Monday 31st Jan: Heavy event driven week ahead for the majors, GDP figure disappoints the market

Weaker than expected Q4 GDP was the main driver of the market on Friday.

However after a brief sell off in the dollar it regained its trading range against the majors. The market expected the GDP figure at 3.5 percent but it was disappointed by only a 3.1 percent figure, which was the lowest since 2001.

The oil prices settled as OPEC said that the supply would continue to be maintained at the current levels.

Currency traders refuse to bend on either direction as the coming week is heavily ‘event driven’ including the Fed monetary policy meet, the G7 meet, the Iraq elections and the payrolls data to wrap it all up. With such events taking place the market movement could be volatile until the outcome of each of the events is analyzed.

The other event clouding the market for a long time now is the speculation over China’s possible revaluation of Yuan. Conflicting views and comments emanating from different countries continue to leave the markets confused.

The single currency hit a high of $1.3080 before it retraced back towards the mid $1.30 levels while the pound after hitting $1.89 slipped to $1.8880 levels. But Yen saw some see saw movement mostly on speculative trades over Yuan revaluation.

Dollar aided by a good show of data

The dollar ended stronger as US economic data provided cause for optimism.

Durable goods orders increased 0.6% the labor market data was also encouraging as jobless claims came in much better than expected for the second consecutive week falling to 325,000.

The better economic data from the US only helped the dollar rally modestly against the European currencies, as the euro dipped to 1.3011 and sterling falling to below the 1.88 mark temporarily.

The Euro/ dollar pair continues to trade in a range ahead of the unemployment report from Germany, which is expected to be exceptionally weak.

The Japanese currency was affected by rather weak retail trade data falling to a low of 103.55. Traders bid the yen higher to the 103 levels before better economic data from the US pared the currency lower.

Oil prices edged higher ahead of the elections in Iraq and the OPEC meeting this weekend.

China’s revaluation continues to be the topic of attention for dollar sentiments, as suggestions for a move to a managed float against a basket of currencies (Euro, Yen Dollar) would in fact be positive for the euro.

China’s somersault on currency peg dents dollar

In the space of 2 days (after indications of nonchalance to global pressures to revalue yuan), China relented and agreed to discuss the currency peg at the G-7 meeting.

But China’s concurrence to sort out this issue may just be tactics to get the heat off its back from the global heavyweights and we may have to wait for the actual event for sometime.

Yen gained to 102.50 levels on the news before Japanese industrial production and consumer spending (that fell by 1.2% and 0.6% in the December reading), exerted some pressure on Yen in the Tokyo session today. But Yen still keeps its head above the critical support of 103.35.

Euro found strength from an unanticipated rise in the Germany’s IFO business sentiment survey (11-month highs), briefly stabbing at the 1.31 area before retracing to 1.3070 levels in the morning session today.

Sterling rushed to a 2-cent gain after the growth in services sector more than made up for the lull in manufacturing, giving some respite to the Bank of England grappling with a slight slowdown in the economy. Belying this worry was the Q4 GDP growth that recorded a rise of 0.7% (expected: 0.5%), revoking the talks of a rate cut.

Despite the fall of dollar against majors on the Chinese whispers on Yuan, the greenback finds some technical support ahead of the GDP data release tomorrow, which is expected to show that the US economy has shown fastest growth since 1999.

Yen slides as China sticks to its guns

The yen fell sharply on Tuesday as lingering hopes that China would revalue the renminbi to coincide with the forthcoming G7 conference finally appeared to bite the dust.

The market took to heart the words of Li Deshui, head of China’s National Bureau of Statistics, who said: “China doesn’t have conditions to adjust the renminbi exchange rate at present. We need a good and feasible plan and formulating such a plan needs time.”

The comments lessened the likelihood of China injecting more flexibility into the renminbi, which has been fixed at Rmb8.278 against the dollar for a decade, despite repeated calls from US and eurozone politicians for it to do so.

John Snow, the US Treasury secretary, added to perceptions that nothing concrete will be achieved at the G7 meeting in London on February 4-5, saying he expected “no change in foreign exchange language”.

As a result, official Asian demand for dollars is likely to remain strong, the rating agency concluded.

The Canadian dollar slumped 1.1 per cent to C$1.2375 against its southern neighbour as the Bank of Canada, which held interest rates at 2.5 per cent, as expected, cited currency strength as the principal reason for weaker-than-expected growth. Since May 2004 the Loonie has risen 11.7 per cent against the greenback.

The US dollar’s gains against the yen and Loonie were seen as the spark for a broader rally which saw the greenback firm 0.6 per cent to $1.2952 against the euro and 0.8 per cent to $1.8642 versus sterling.

Weak dollar story continues

The Dollar fell again as a number of factors had a negative impact on it.

Pressured by rising oil prices, currently at $48.88 due to a colder US weather, persistent violence in Iraq and comments from US Treasury Secretary – John Snow on not expecting the G7 finance ministers to tinker with the wording of their currency market statement during their meeting next weekend, yen dropped all the way to 103 before stabilizing towards the 102.60 levels.

In its policy board meeting, Bank of Japan sought to reduce liquidity by lowering its account balance target but would closely monitor the forex moves and the rising oil prices.

As Europe once again called for Asian countries to share the burden of a weakening dollar, euro weakened against the yen to 133.70. Sterling hovering around 1.8770 awaits Monetary Policy Committee minutes due tomorrow to take any further direction.

A rise in Aussie CPI by 0.8 percent from Q3 and up 2.6 percent y/y sees AUD at 77 cents against the dollar.

With an eye on today’s US existing home sales (expected lower at 6.8 million from a 6.94 previous) and a fall in consumer confidence, the market could be range bound before the US session with dearth of data expected from the euro zone.

Monday 24th Jan: Weekend profit taking and soft consumer sentiment weighs on the Dollar

The Dollar fell across the board on Friday as weekend profit booking just before the single currency hit a crucial barrier at 1.2930 and a softer than expected Michigan consumer sentiment data hit the market.

Rumors that the Fed Chairman Mr. Greenspan was not in favor of increasing the pace of rate hikes added fuel to the euro’s rise, leading to a fall in the US currency by almost a cent. Further comments by various Fed officials reiterating the Fed’s stance of rate hikes at a “measured pace” failed to change the market outlook.

Sterling also regained some of its lost ground piggybacking on its European cousin’s gains even though retail sales figures dropped 0.1 percent – its largest drop since 1981.

Yen also gained around 1.4 yens after losing steam during the week on hawkish comments from the Fed speakers and reports stating that China may not revalue its currency until next year. But Bank of Japan appears to be increasingly comfortable with Yen’s gains as the economy is wriggling out of its decade old deflationary spiral.

This week the market will look out for a plethora of data releases from the US including consumer confidence, the durables goods orders and advanced Q4 GDP.

Fri 21st: Sterling falls as festive retail sales dive

Sterling fell in European trade on Friday as retail sales data pointed to the bleakest Christmas on the high street since 1981.

Retail sales fell 1 per cent month-on-month in December, far worse that the consensus forecast for a 0.3 per cent rise, dragging the annual rate down to 3.2 per cent from 5.9 per cent, its lowest rate since November 2003.

Short-sterling rates fell, indicating a swing towards the argument that the Bank of England’s next rate move will be downwards, reducing the yield appeal of sterling. The pound fell 0.6c to $1.8642 against the US dollar, 0.4p to £0.6962 against the euro, 2.3c to A$2.4396 versus the Australian dollar and Y0.3 to Y193.18 against a broadly weak yen.

However sterling’s slide was kept in check by overnight comments from Mervyn King, the governor of the Bank of England. Mr King said it was “foolish” to put much weight on a single month’s retail sales figures, “especially at Christmas”, adding that it would not be until Easter that a clear picture of consumer demand around the Christmas and New Year period would emerge.

This led many commentators to conclude that Mr King had already seen the data and was intentionally sending out a message that it would not necessarily prompt a cut in the base rate.

The comments “suggest Mr King had seen the number beforehand and was trying to play down its significance,” said James Knightley, economist at ING Financial Markets. “He is therefore indicating that the BoE is sticking with its ‘wait and see’ stance”.

“The BoE will continue to await post-Christmas data before any meaningful argument can be built for a deviation from the current steady-rate outlook,” added Lena Komileva, market economist at Tullett Liberty and Prebon Yamane, who argued next week’s monetary policy committee minutes would confirm this view.

Elsewhere the yen was soft, tumbling Y0.6 to Y134.57 against the euro and Y0.15 to Y103.57 against the dollar. There were few fundamentals to explain the move, with comments from Sadakazu Tanigaki, the Japanese finance minister, that exchange rates should reflect economic fundamentals or Japan will take “appropriate action” a mere restatement of previous comments.

However there was a perception that some in the market were edging away from the view that the meeting of G7 finance ministers in London on February 4-5 would herald a revaluation of the Chinese renminbi, a move that would be likely to lift all Asian boats.

The New Zealand dollar firmed 0.4c to $0.7080 against its US namesake as retail sales beat expectations, rising 0.7 per cent month-on-month in November compared to forecasts of 0.5 per cent.

“In a low inflation environment this is very strong in volume term,” said Tim Fox, head of market strategy at National Australia Bank. “Signs the economy is not slowing amidst acute capacity pressures puts added pressure on the Reserve Bank of New Zealand, with the balance of risks quickly shifting towards rate hikes in the first half of this year.”

Other commodity currencies were buoyed by a renewed surge in some metals prices, with zinc rising to a seven-year high. The Canadian dollar rose 0.8c to $1.2252 against the greenback, with the Australian dollar 0.5c higher at $0.7638.

Thu 20th Jan: Swinging fortunes of dollar

The greenback was near 2-month highs against the majors after some technical rally in majors fizzled out as data releases from the US came near expectations.

Especially when the core CPI (measuring inflation) registered a 0.1% drop compared to previous figure of 0.2% on lower gasoline prices. There’ll now be lesser pressure on the Fed to hike rates at a faster pace than necessary. Also contributing to the dollar’s gain was the jobless claims figures that came down by 48K to 3,19,000 (biggest drop in 3 years) and housing starts going up by 2 million units (forecast: 1.9 mln).

Adding to the bonhomie for dollar was the US oil inventories level that rose surprisingly beating forecasts and crude is down to $46.89. The Fed Beige book survey on the regional US economic growth showed expansion and no alarming news on the prices front.

Across the Atlantic, jawboning from the French Minister who averred that the dollar decline should end now also gave a leg up to the dollar and may portend further losses for the single currency and hence some balm to beleaguered E-12 economy hit by the strong Euro. But a sustained break below 1.30 has not come to fruition as it bounced back from lows of 1.2967.

Yen faces stiff resistance at 103 levels and the early morning Asian session saw it weakening to 102.90, Euro trading at 1.3009 and Sterling dropping to 1.8728.

Wed 19th Jan: Dollar receives a boost from capital inflows, session marked by speeches from central bankers

The dollar in a relief rally pushed the envelope of the single currency all the way to $1.2995 levels as it gained almost a cent after extremely positive capital inflows numbers more than offset the ever increasing trade deficit figures.

The capital inflows into the US rocketed to a 68 percent rise to $81 billion- the highest figure in 5 months. This was largely on account of the surge in the equities flows reflecting post election optimism in the economy.

But the dollar could not hold on to its gains as it again slid back towards the 1.3030 levels by early Japanese session.

Sterling also initially lost heavy ground to the greenback on this higher than expected number but the release of the December inflation number from UK jumping to an unexpected 1.6 percent helped it recoup the two cent loss.

Yesterday’s trading session was also marked by plethora of central bankers talk with the Fed officials from Philadelphia, Minneapolis and Cleveland all giving their interpretation of the future course of inflation and interest rates in the US.

Across the Pacific Japanese central bank also continued on its jawboning stating that it would intervene individually in the markets if required to curb excessive volatility in Yen which after dropping to a low of 102.80 hit back towards 102.20- in a move likely to breach the 101.50 level.

Tue 18th Jan: Euro damaged on faster rate hike murmurs from Fed

With the foreign exchange markets fairly in a lull due to holiday in the US yesterday, traders look forward to the portfolio inflows data (TICS) from the USA to confirm if a repeat of the trade figures will mar the greenback yet again.

Even if the data disappoints, investors may be tempted to pump inflows into the US in the coming months after the Fed indicated faster pace of rate hikes causing US assets to look more attractive. The greenback gained support from speculation that the US may take steps to reign in its ballooning budget deficit with Bush having some plan up his sleeve ahead of his re-installation for a 2nd term.

The Euro suddenly started nose-diving in the Tokyo session on fears of interest differential with dollar widening at a faster pace in the next few quarters. Yen pulled away from its 5-year highs against dollar but BoJ still looks unwavering except the lone voice of finance official Tanagaki who indicated that Japan may act to stem Yen’s gain if necessary and BoJ persisted with its zero-interest policy to prevent deflation and curtail Yen’s strength. Yen lost some steam and is currently trading at 102.50 after the Japanese consumer confidence also fell.

The Sterling was damaged after preliminary reports indicated a slowdown in retail sales in the holiday period of December as record debt, housing market slowdown and likely tax increase in the UK may have weighed on the consumer spending. The retail sales figures due on Friday and housing prices data today may yet again confirm Cable’s weakness with a technical corroboration as well which led to stops triggering a cascade effect at 1.8650 leading it to the current levels of 1.8565 (8-week low).

Euro is trading around a crucial support of 1.3025 and a clean break would open the doors to a considerable barrier of 1.2935 – 60 region (former all-time highs).