Articles from April 2005

Stagflation fears increase

A lower than expected US GDP growth rate (3.1%, Exp: 3.4%, Pre: 3.8%) confirming the slow growth and inflationary fears, caused ripples in the stock and bond markets – the former (Dow and S&P;) losing by 1% and the Treasuries gaining by 4 to 5% across tenors.
The US Dollar, however, with expectations of a rate rise, maintained its strength against major crosses. GDP Price Deflator, shooting up to record high (3.5%, Exp: 2.0%, Pre: 2.3%) added to the inflation talks.
The reaction to GDP data was limited because of the ambiguity and misinterpretation, as the weakness in growth came primarily from inventories and not consumer spending. Consumer spending has seen a fall in last readings due to oil prices, but not as much as market expected. The markets are expected to remain choppy for couple of more days, with market eying the FOMC meeting on May 3.
US Treasuries were seen down in US session on inflation concern. midst fears of slowing growth, once again prompted by poor durable goods orders (actual: -2.8%, exp: 0.3%, prev: -0.2%), greenback managed to sustain its strength. The initial spurt in treasury prices subsided with a rather lukewarm reception of 2-year Treasury auction. The 10-year Treasury ended at 4.24% (previous 4.28%). The market is now eying the most awaited GDP and Chain Deflator data to be released today. Despite occasional fears, GDP growth expectations are maintained at 3.5% with previous being 3.8%. Chain deflator is also expected to reduce to 2.1% from previous figure of 2.3%.
GDP and deflator data are expected to give some bruises to dollar again, with major crosses expected to gain.
Outlook for the day
EUR/USD – With Euro zone business confidence expected to show poor readings, Euro is expected trade in 1.2880 – 1.2940 range and end the week on a lower tone.
GBP/USD – Cable is showing strong independence to data in last couple of weeks, with the range being 1.9060 – 1.9140. It clearly seems to be a wait and watch position with market awaiting a major break through on either side.
USD/JPY – Technically Yen looks weak, with current range being 105.60 – 106.40 and marching towards 107.00 in near future.

Growth wobbles create worries

Amidst fears of slowing growth, once again prompted by poor durable goods orders (actual: -2.8%, expected : 0.3%, previous: -0.2%), the greenback managed to sustain its strength.
The initial spurt in treasury prices subsided with a rather lukewarm reception of 2- year Treasury auction. The 10-year Treasury ended at 4.24% (previous 4.28%). The market is now eying the most awaited GDP and Chain Deflator data to be released today.
Despite occasional fears, GDP growth expectations are maintained at 3.5% with previous being 3.8%. Chain deflator is also expected to reduce to 2.1% from previous figure of 2.3%. GDP and deflator data are expected to give some bruises to dollar again, with major crosses expected to gain.

Outlook for the day
EUR/USD – Euro is seen gaining on GDP expectations and will move in the range of 1.2900 – 1.3020.
GBP/USD – Cable, holding the crucial 1.9000 level and tracking the dollar weakness, will trade in the range of 1.9000 – 1.9110.
USD/JPY – Despite constant flow of bad Japanese data, Yen sustained its marginal gains and is expected to trade in the range of 105.50 – 106.30.

euro slips on growth news

With US Existing Home Sales at 6.89 Mn (Previous:6.82 Mn), and New Home Sales at 1431K (Previous:1275K) reported to have grown at their fastest rate in the last 11 years – there are no longer any doubts that US growth rate is sustained and that there is no slowing down.
The market completely shrugged off a drop of 5.3 points in Consumer Confidence and the US dollar rally against major crosses took up once again.
But consumer confidence is still a key area of concern as this is the third consecutive drop in the numbers.
With interest rate differentials of USD and the euro widening, the market is taking further bullish clue on dollar. Durable goods orders expected today may put in some pressure on dollar exchange rates.

Outlook for the day

EUR/USD – With a weaker bias in Euro on positive US data yesterday, it is expected to move in the range of 1.2940-1.3020, testing strong support at 1.2940.
GBP/USD – With break out of psychological level of 1.9100, cable is expected to test support at 1.9010, 1.9110 being the resistance.
USD / JPY – Yen, losing ground against dollar on strong data from US, is expected to move in 105.75 – 106.80 range.

China denies Yuan revaluation

With Chinese currency officials denying revaluing Yuan peg in 2005, the markets have started taking a clue for Asian currencies from it, with Yen already trading at a 1-month high.
With the week full of Japanese and European data the US Dollar may try to recover on any negative sentiment. Markets are expected to be jittery with both side movements during the week.

Outlook for the day

EUR/USD – With Euro losing on technical selling against the Dollar, the range is expected to be 1.2975 – 1.3120.
GBP/USD – Cable is also losing ground against the dollar in early Asian trade, and is expected to move in 1.9060 – 1.9220 range.
USD/JPY – Yen’s gain on Chinese Revaluation talks is expected to last for the day with the range being 105.20 – 106.20.

Dollar falls on stagflation worries

The US dollar hit a one-month low against the euro and Swiss franc on Thursday as the spectre of a slowdown in global growth loomed large over the foreign exchange markets.
Comments from Federal Reserve Chairman Alan Greenspan over the possible long-term effects on the US economy of rising defecits were largely ignored as investors concentrated on the shorter term. The jury was out as to whether the US economy was experiencing a soft patch sparked by recent surging oil prices or on the verge of a more lasting economic downturn.
However, currency movements seemed to reflect an increase in risk sensitivity. In such an environment, “safe haven” currencies like the Swiss franc would be expected to benefit and the euro would be expected to outperform both the dollar and the yen as the eurozone is less exposed to the global growth cycle than export-driven Japan or the US, analysts said.
The Swiss franc duly hit a one-month high of SFr1.1740 against the dollar and the euro followed suit hitting a one-month high of $1.3124 per euro. However, the dollar recovered by mid-afternoon in New York to stand at Sfr1.1788 and $1.3077 against the Swiss franc and euro respectively.
Adding to pressure on the yen on Thursday were fears over the recovery of the Japanese economy. Trade data revealed that exports fell by 1.3 per cent over the first quarter of 2005, depressing real gross domestic product for the third quarter in succession.
The dollar moved higher against the yen in early trade yesterday, hitting a high of Y107.43, up 0.5 per cent on the day, before slipping back to Y107.00 by mid-afternoon in New York.
A surprise dip in UK retail sales sent sterling lower against the dollar and the euro on Thursday as data revealed the lowest annual growth rate since August 2003.
Analysts had been looking for a rise of 0.4 per cent for March, but instead were presented with a monthly fall of 0.1 per cent. Annual retail sales growth slipped from 3.6 per cent to 2.7 per cent.
Given that minutes from the April meeting of the Bank of England’s Monetary Policy Committee reiterated the fact that uncertainty regarding the strength of UK consumer demand was the key impediment to a hike in interest rates, investors speculated that this latest release could mean the UK’s monetary policy cycle had peaked.
Sterling fell 0.5 per cent against the dollar from its overnight close to $1.9086 and against the euro fell 0.4 per cent to 0.6853.

US Dollar slips v sterling

A higher than expected CPI data release failed to lift the Dollar as players focused more on its negative fundamental effects on the economy.
US consumer prices rose 0.6% in March (against an expectation of a 0.5% rise) while core CPI (excluding food and energy prices) rose by 0.4% again higher than a 0.2% forecast. Higher inflation figure along with recent soft economic data releases provided ideal situation for sell-off in equity markets.
The Benchmark Dow Jones industrial index fell more than 1% to close just above the psychological 10,000 mark.
In other data releases yesterday, the minutes of the latest BOE meeting showed that rate setting committee voted 7-2 in favour of stable interest rates.

Outlook for the day
EUR/USD – After breaking a key resistance near 1.3075, Euro is expected to move higher to trade in 1.3050-1.3200 range.
GBP/USD – GBP is expected to trade in 1.9150-9250 range.
USD/JPY – USD/Yen is pushing its way towards 105.80 support and expected to trade in 106-107 range today.

Sterling and Canadian Dollar rises

The US Dollar broadly extended its losses and moved down against all its counterparts in the trade yesterday. Sterling and Canadian Dollar were the prominent gainers rising about a percentage point.
The US March PPI data was mixed with the headline inflation rising to 0.7% against the expectation of 0.6%. However, the important core inflation (excluding volatile energy and food prices) was lower at 0.1% against the expectation of a 0.2% rise.
Major Global equity markets witnessed some more recovery yesterday with the Dow Jones Industrial index closing up by half a percentage.

Outlook for the day
EUR/USD – Euro is testing an important technical resistance near 1.3080. Expected range 1.3000-1.3100.
GBP/USD Momentum in current GBP rally is expected to push it further up today. Expected range 1.9100-1.9250.
USD/JPY After breaking 107support, USD/Yen is expected to move towards 106 levels. Expected range 106-107.50.

More US Dollar weakness

The US Dollar moved down against most of the majors with Euro and GBP breaking important resistance at 1.3000 and 1.9000 respectively.
However, the US currency managed to hold its last week’s gains against commodity currencies mainly AUS D and CAD.
The Euro got some support from inflation data release with March CPI rising to 0.7% (previous 0.3%) on month/month basis.
Players would keenly watch US inflation data releases due today (PPI) and tomorrow (CPI) for further direction.

Outlook for the day
EUR/USD – After breaking 1.3000, Euro is attempting resistances at 1.3050 and 1.3075 levels.
GBP/USD After breaking 1.9000, GBP is likely to move further up and expected to trade in 1.8975-1.9125 range.
USD/JPY Yen is expected to trade in 107-108 range today.

Dollar slips

Despite good capital inflows reading, US Dollar could not extend its gains beyond major technical levels and eroded most of its earlier gains on weaker consumer sentiment and manufacturing data.
US capital flows in February were slightly lower than January inflows at USD 84.5 billion but higher than the expected figure of around USD 60 billion. However, University of Michigan headline consumer sentiment index fell to 88.7 against the expectation of 91.5. New York Federal Reserve Empire State index (reflecting manufacturing activity) fell to its two-year low level to 3.12 in April from 20.18 in the previous month. In G7 meeting, finance ministers and central bank chiefs of developed economies sharpened their rhetoric against Chinese currency system. They also urged oil producers to further increase supplies, asked US to narrow the budget deficit and suggested Japan and Europe to boost domestic demand.

Outlook for the day
EUR/USD – Euro is expected to trade in 1.2800-1.2950 range and facing stiff resistance in 1.2950-30 area.
GBP/USD – GBP too faces stiff resistance in 1.8950-1.9000 area.
USD/JPY – Yen is expected to appreciate towards 107 level. The pair faces resistance at 108.50 area.

Imbalances worsen

Warning: global economic imbalances are getting worse. The US trade deficit rose to a new record $61bn (£32bn) in February. This was not supposed to happen. Global imbalances were expected to narrow as the economic cycle matured. Instead they are increasing.
The International Monetary Fund is worried that this trend will continue, increasing the risk of a sudden adjustment at some point in the future.
The economic argument is familiar. The US current account deficit is not sustainable in the long run. If private investors lose faith that a gradual adjustment is feasible, or foreign central banks stop accumulating US assets, the dollar could fall sharply. This would probably prompt a similarly abrupt rise in US interest rates, which could kill off the US housing and consumption boom and explode over- leveraged financial institutions, with severe global consequences.
Two months ago Alan Greenspan suggested that market forces appeared “poised to stabilise and, over the long run, possibly to decrease” the US current account deficit. The IMF believes the current account deficit will indeed stabilise but at an unsustainable level: about 5.7 per cent of gross domestic product in 2005 and 2006, unless the dollar falls further.
The immediate culprit is the widening growth differential between the US (and China and the UK) on the one hand, and the eurozone and Japan on the other. The US has powered ahead. But growth faltered in the eurozone and Japan. The IMF now expects the eurozone to grow at only 1.6 per cent and Japan at 0.8 per cent this year. It wisely urges the European Central Bank and the Bank of Japan not to jeopardise this – though, bizarrely, it still thinks Japan should raise taxes.
Policymakers have shirked their responsibilities to tackle the underlying causes of the imbalances. The US is not doing nearly enough to reduce government borrowing; the eurozone is moving too slowly with growth-promoting labour market reforms; Japan still has its own structural problems to overcome; and Asia as a whole is resisting currency appreciation.
The news is not all bad. Emerging and developing economies enjoyed strong growth last year and are likely to do well again this. Even sub-Saharan Africa grew at more than 5 per cent last year and is forecast to do so again this year and next. This is a tribute to better economic policymaking as well as strong commodity prices and a fortuitous reduction in conflict and drought. But the world’s most fragile economies can only prosper in a benign global environment. Imbalances put this at risk.
The IMF’s analysis is sound. Now is the time for more effective advocacy. The IMF cannot tell powerful countries what to do but it should assert a bigger role in forging an effective multilateral strategy to tackle imbalances. This is the test for Rodrigo Rato, its managing director. This weekend’s spring meeting is the place to start.