Articles from March 2005



Investors await tomorrow’s US payrolls

The US dollar drifted slighly lower but remained rangebound against the major curencies on Thursday ahead of key US and Japanese data due out on Friday.
After hitting a five-month high of Y107.69 against the yen in the previous session, the dollar fell back in Asian trade as fiscal year-end dollar demand diminished after the Tokyo fixing. The dollar declined from Y107.35 to Y107.00 immediately after the fixing, but observers noted that the move was not as aggressive as in previous years and expected the new fiscal year in Japan to stimulate demand for dollars.
The beginning of the Japanese fiscal year in 2004 saw a marked increase in demand for foreign bonds by Japanese investors and suggests that any further dollar weakness in the very near-term should be utilised to establish long dollar/yen positions for a move toward the key Y110.00 level.
The market will focus especially on the non-farm payrolls data to look for any hint of inflationary pressure that could spark the Federal Reserve into tightening US monetary policy. The consensus forecast is for 220,000 more jobs to be added in the US in March, but analysts said that the figure is notoriously hard to predict.
Also released on Friday is the Japanese tankan report, which is expected to show business confidence has improved marginally. A strong showing could increase investor demand for Japanese stocks and support the yen.
By midday in London the dollar softened to Y106.90 against the yen, down from Wednesday’s New York close of 107.47.
The euro also made up some ground against the dollar, moving to $1.2960 by midday in London, up from Wednesday’s New York close of $1.2921.
However, the move had much more to do with dollar softening across the board than any interest in the single currency. Figures revealed that economic sentiment in the eurozone worsened, as inflation remained at 2.1 per cent for the second consecutive month, diminishing corporate and household spending . For the Euro area, the economic sentiment index for March declined to 97.4 from 98.8 in February.
Sterling was put under pressure as data from the Nationwide Building Society showed that in March UK house prices fell at their sharpest rate in nearly ten years. The pound moved £0.6893 against the euro, having closed in New York on Wednesday at £0.6875. Against the softer dollar however, the effect was marginal with sterling moving just 10 cents higher from Thursday’s close to $1.8800.

US Fed policy looks different to long term investors

To judge by the jitters that have hit the markets lately, the effect of Federal Reserve moves to raise short-term interest rates is clear and simple- that higher rates are bad news for both stocks and bonds.
It’s as straightforward as that: When the cost of money goes up, business feels the pinch. So does the supply of funds available to bid for securities, and so do the animal spirits that set the mood of financial marketplaces around the world.
The rule is easy to remember, even as the effects of higher interest rates ricochet through the system in a bewildering variety of ways.
What’s the strange, ultra-sensitive connection between rising U.S. interest rates and stocks in emerging markets at the far corners of the world? Well, for one thing, higher rates cast a shadow on the so-called “carry trade,” the common practice of speculators who borrow in the money markets to finance purchases of such things as Chinese or Eastern European or Latin American stocks.
And so it occurred again- that from March 11 through to March 23, a stretch of a mere eight trading days leading up to and including the latest increase by the Fed in the overnight money rate, the MSCI Emerging Markets Index tumbled 6.4 percent.
The effect on more developed markets was similar, though less extreme. The Standard & Poor’s 500 Index, dominated by big U.S. stocks, fell 2.3 percent.
That’s not at all the sort of thing most conservative income- seeking investors have in mind when they venture into bonds. The damage can magnify many times over in the interest-rate futures markets and wherever else fast money trades in and out of bonds.

US rate hike speculation boosts dollar

The US dollar moved higher across the board on Monday, hitting a four-and-a-half month high against the yen, helped by expectations that US jobs data- which are due out on Friday will give the Federal Reserve more reasons to raise interest rates more agressively.
Speculative buying pushed the greenback to Y107.16 against the yen in late Asian trade, a level last seen on November 11 2004. The dollar settled back to Y106.80 by 11.00 GMT, up from Friday’s New York close of Y106.39.
The euro also moved lower against the dollar, trading at $1.2915 at 11.00 GMT, down from Friday’s New York close of $1.2956. Earlier in the session the euro had moved down to $1.2888, its lowest level since February 14. Similarly the dollar hit its highest level since February 14 against the Swiss franc, briefly trading at $1.2067, before pulling back to trade at $1.2030 by 11.00 GMT.
Sterling moved down to $1.8638 against the dollar by 11.00 GMT, having finished at $1.8696 on Friday, after hitting a low of $1.8595 earlier in the session.
Dealers said that sentiment had turned in the dollar’s favour following last week’s data showing core US consumer prices rising at their fastest rate since 2002. The Federal Reserve said that it was prepared to rise interest rates faster than the current ‘measured’ pace if inflation heats up.
All eyes therefore will be on this week’s economic news from the US that culminates in Friday’s non-farm payroll data, which is expected to show that the US economy created 220,000 in March, for signs that the economy is overheating.

Dollar rises to one-month highs

The near two-week old unwinding of dollar-funded carry trades continued on Wednesday, as hawkish comments from the Federal Reserve and rising US inflation pointed to further US rate hikes ahead.
The move spilled over into other major currencies, with the dollar rising to one-month highs against the euro, yen, sterling, Swiss franc and Australian dollar. The dollar rally was aided by the newsflow from Europe, with German business sentiment disappointing and the Bank of England releasing soft minutes. But there was no doubt the rally was made in the US.
Dollar-buying was set in train by the Federal Reserve, which on Tuesday warned that inflationary pressures were building and output growth was “solid”. A raft of analysts warned that the risk to their end-of-year interest rate forecasts, generally in the range of 3.75-4 per cent, was now to the upside.
These sentiments received a further shot in the arm when headline consumer price inflation came in at 0.4 per cent month-on-month in February, with the core rate at 0.3 per cent, both ahead of forecast.
The dollar rally has been most pronounced against high-yielding emerging market currencies, as rising US Treasury yields erode the attractiveness of dollar-funded carry trades, leading to an unwinding of these positions. But on Wednesday the dollar made serious headway against other major currencies.
The dollar broke through the $1.30 barrier against the euro for the first time in five weeks, pushing to $1.2973, a gain of 1.7 per cent since the Fed statement. The greenback also strengthened 0.9 per cent to Y105.94 against the yen, 1.7 per cent to $1.8686 versus sterling, 1.8 per cent to SFr1.1980 against the Swiss franc and 2.6 per cent to $0.7703 against the Australian dollar.
The New Zealand dollar plunged 3.6 per cent to $0.7159 as New Zealand’s current account deficit widened to NZ$3.1bn in the fourth quarter, against expectations for NZ$2.4bn. The deficit equalled 6.4 per cent of GDP in 2004 as a whole.
Sterling slipped to £0.6944 against the euro and Y197.96 against the yen on Wednesday on the back of the minutes of the Bank of England’s last policy meeting.
Despite the Bank’s monetary policy committee voting by a reduced majority of 7-2 against an immediate rate hike, the consensus was that the minutes were broadly dovish.

FED raises US interest rates to 2.75pc

The US Federal Reserve raised interest rates yesterday for the seventh time in a row and said it would continue to tighten monetary policy at “a measured pace”. The rise in rates by a quarter point to 2.75pc had been widely anticipated and Wall Street was more focused on the text of the accompanying statement.
Financial markets feared that the phrase “measured pace”, which the Fed has consistently used to describe its policy of modest quarter point rises, might have been dropped, indicating larger upward moves could be on the horizon.
The Fed said that “longer-term inflation expectations were well contained” and said that higher oil costs had not yet fed through into core inflation.
Nevertheless, the bank did note that “pressures on inflation have picked up in recent months and pricing power is more evident”. It also described the pace of growth as “solid” rather than “moderate”. The Fed also noted that the balanced risks assessment to both growth and inflation was contingent on “appropriate monetary policy action”.
The dollar jumped higher against sterling and the euro after the announcement, along with Treasury yields.
The yield on the benchmark 10-year note shot up to 4.59pc from 4.48pc just before the announcement, while the Dow Jones Industrial Average was 50 points lower at 10515.
Most analysts believe the neutral level of US interest rates is about 4pc. Bear Stearns is predicting rates of 4.5pc by the end of 2005, a level which would require a 50 basis point rise at some point during the year.
The Fed’s unanimous decision came after data released earlier in the day showed US producer prices rising. Wholesale prices rose 0.4pc in February, while the core producer price index rose 0.1pc.
In the UK, inflation measured by the official Consumer Price Index remained at 1.6pc in February, defying expectations of a rise. Faltering consumer demand meant retailers were unable to raise shop prices after the New Year sales by as much as in previous years.

US Dollar up ahead of Fed meeting

The US dollar continued its mini-rally on Monday, buoyed by suggestions that the Federal Reserve could signal a faster pace of monetary tightening when it meets on Tuesday.
The Fed is widely expected to raise interest rates by 25 basis points to 2.75 per cent, but the accompanying statement may be more illuminating, with some banks, such as UBS and Citigroup, suggesting the pace of tightening will no longer be described as “measured”.
While most analysts still expect the word “measured” to be maintained for now, there are widespread expectations of more hawkish language.
With both producer and consumer inflation data due from the US this week, as well as a long weekend looming, speculators have every reason to cut their exposure to risk by continuing to reduce short-dollar positions. The cost of funding short-dollar positions will also become more expensive, assuming the Fed does hikes rates.
After gaining ground for the first time in six weeks last week, the dollar strengthened a further 1.1 per cent to $1.3162 against the euro, 0.3 per cent to Y105.09 against the yen, 0.7 per cent to C$1.2115 against the Canadian dollar, 0.9 per cent to $0.7861 against the Australian dollar and 1.1 per cent to $1.8973 versus sterling, a four-week high, although trading was thin, exacerbated by a public holiday in Japan.
The dollar even withstood comments from Christian Noyer, a council member of the European Central Bank, who said central bank and private sector diversification from the dollar was “under way”.
The euro was under pressure after a decision by EU finance ministers to water down the stability and growth pact which, in theory at least, limited member states to fiscal deficits of 3 per cent of GDP.
ABN Amro said the “euro’s credibility was dealt a blow” by the decision. The single currency fell 0.8 per cent to Y138.31 against the yen.
High-yielding currencies suffered just as badly as speculators continued to unwind the dollar-funded carry trades that had served them so well.
Sterling was weak across the board, falling 0.8 per cent to a four-week low of Y199.44 versus the yen. The speculative sector remains very long sterling-dollar, making the pound potentially acutely vulnerable to the ongoing liquidation of dollar shorts.
Several emerging market currencies saw further weakness as western funds cut exposure amid a further loss of appetite for risk. The new Turkish lira fell 1.4 per cent to a six-week low of TL1.3360 to the dollar, while the Polish zloty and Czech koruna fell 2.4 per cent and 1.6 per cent against the euro respectively, before recovering somewhat to 4.0537 zlotys and Kc29.975.

US, Japan, Germany, France and UK face junk debt ratings

Rapidly rising pension and healthcare spending will reduce the debt status of the world’s richest industrialised countries to junk status within 30 years unless their governments move quickly to balance budgets and reduce outgoings according to Standard & Poor’s.
The credit ratings agency says if fiscal trends prevail, the cost of ageing populations will fuel downgrades of France, the US, Germany and the UK from investment grade to speculative, or junk, category France by the early 2020s, the US and Germany before 2030 and the UK before 2035. They are currently in the top Triple A category, ensuring they can borrow at low rates.
The debt ratios of these countries are set to reach levels not seen since the second world war, S&P; says.
S&P;, says: “Without further adjustment either to current fiscal stance or to social and healthcare costs, the general government debt ratios of France, Germany and the US will surpass 200 per cent. This will result in deficits more akin to those associated with speculative grade sovereigns.”
All big industrialised nations face the problem of large unfunded pension liabilities and rising healthcare costs as populations age. Most have responded with limited moves to make benefits less generous. But S&P;’s projections already factor in the reductions in public sector pensions made by Germany and Italy last year.
The agency estimates that according to current trends US general government debt will soar to 239 per cent of gross domestic product by 2050, against 65 per cent today. France’s will reach 235 per cent against 66 per cent, Germany’s 221 per cent against 68 per cent, and the UK’s 160 per cent against 42 per cent. Italy, which has run more disciplined budgets because of its already-high debt burden, will see its ratio fall to 91 per cent from 104 per cent, assuming it maintains the current trend. S&P; said last year the debt ratio of Japan, the most heavily indebted industrialised country, was set to surpass 700 per cent of GDP by 2050.
The agency’s model shows countries can ease the impact of ageing by running tight budgets before demographic pressures peak. The US has healthier demographic trends than Europe but its budget deficit will add to the pain when population ageing accelerates about 2020.

Dollar aided by Japanese reassurance

The US dollar strengthened in European morning trade on Friday, continuing its bounceback from weakness in the wake of Wednesday’s disappointing balance of payments data.
The dollar was aided by comments from both Japan and South Korea that they had no plans to alter the currency composition of their foreign exchange reserves. The duo hold more than $1,000bn of reserves between them, the vast majority of which is held in dollar assets.
The greenback drew further support from comments by Wolfgang Clement, the German economy minister, who warned that “exchange rate developments”, alongside rising oil prices, were creating problems for the German economy.
Eurozone politicians have been remarkably silent about the strength of the euro against the dollar in recent months, having been vocal on the subject for much of last year. Any pick-up in verbal intervention could damp expectations that the European Central Bank is edging towards a rate hike, thereby pulling any semblance of yield support away from the euro.
The dollar firmed 0.6c to $1.3316 against the euro on Friday, as well as adding 0.8c to $1.9168 against sterling and Y0.35 at Y104.85 against the yen, as Japanese importers were probably hedging their dollar exposure further out than usual to take advantage of the yield gap between the US and Japan, with three-month rates now at their widest since September 2001.
The greenback also made headway against the high-yielding Australian and New Zealand dollar, strengthening 0.3c to $0.7902 and 0.3c to $0.7392 respectively. The antipodean duo have largely escaped unscathed from a modest liquidation of US dollar-funded carry trades in the last 10 days, sparked by a rise in US Treasury yields that makes borrowing in the US more expensive and erodes the yield differential of high-yielding currencies.
However, several of the emerging market currencies that have suffered in the sell-off held onto the gains they made in a partial rebound in the second half of Thursday’s trade. The Brazilian real traded at R$2.7185 to the dollar, with the Turkish lira at TL1.314 and the South African rand at R6.0665. The Polish zloty firmed to 4.0605 zlotys to the euro while the Hungarian forint held steady at Ft245.68.

Dollar electrocuted by the ‘current’ account deficit

Greenback’s glitters after the TICS report were washed out after reports affirmed that the buff was mostly on account of private investments and hedge funds flows and confirming that Japan, (the biggest holder of US treasuries) is reducing its exposure to the depreciating currency.
The current account gap widened more than expected (181.9bn) in the fourth quarter to a record $ 187.9bn coupled with US crude futures jumping to a record high, at around $56.63/barrel, adding to investors’ distaste with the dollar.
The single currency was also stimulated with rumors in the air that ECB would hike rates by September though the central bank was reluctant to comment on it.
Yen was bolstered overnight by the bank of Japan upgrading its assessment of the economy slightly, keeping its monetary policy unchanged. U.S. housing starts rose 0.5% last month to a 21-year high together with a robust industrial production but the joy was ephemeral for Uncle Sam as there are whispers from quite a few central banks to diversify their country’s forex reserves.
Sterling also gained strongly at the dollar’s expense, rising 0.9 percent to $1.9286 as soon as British Finance Minister Gordon Brown averred that he saw inflation at 1.75% this year reaching to 2% in 2006 and beyond.
Traders await today’s release of industrial production figures from the Euro zone, expected it to be up 1.3%. Technically Euro might enter into a territory of 1.3480-90 if it closes above the 1.3422 range seen earlier.

Surging US Capital inflows data rescues the greenback

The greenback made major inroads against the international currencies, bolstered by a second highest on record figure of net foreign purchases of US assets.
The data indicated net capital inflows of $91.5 billion in January, substantially higher than the trade deficit figure of $58.3 billion – an indication to substantiate the fact that US attracts more investments than its trade deficit.

Euro plunged below the 1.33 mark following the capital inflows data after briefly touching the 1.34 mark initiated by a 6-month peak in Germany’s ZEW survey reading.
Cable too felt the heat and drifted towards the 1.9125 levels following the robust US data release, inching towards the crucial support of 1.91 mark.
Notwithstanding the overall rise in capital inflows, Japanese purchases (who are the largest holders of US treasuries) of US assets reduced 1.4% – pointing a 4th decline in the past 5 months – sending doubting signals to the currency markets and suggesting that the Japanese are indeed diversifying their reserve assets.
The Yen held around the 104.50 mark in early Tokyo trade.
Separately, the comments from Saudi Arabia’s oil minister stating that he would press for supply increase had a short lived cooling effect on the oil prices, which regained the $55 per barrel mark.