Chart Driven Forex Investors Push Euro Up
The Euro has been pushed upwards by chart driven Forex investors following the upward trend and also by Forex investors re-evaluating their interest rate expectations for the region and buying more Euro’s to invest in European assets.
In other news the Bank of England’s (BoE) inflation report contributed to pressure on the GBP as the Forex market reduced its interest rate expectations. The BoE expects inflation to drop below the desired 2% annual CPI over the next 12 months. The GBP fell briefly as the inflation report was released, but quickly recovered to stabilize about 1.95.
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US Treasury market starts trading for real today
Today, trading will resume in the US markets following a day of mourning for former president Ford. So, trading start the new year only today, but with an extremely busy and important calendar that contains the December ISM, car sales and ADP employment
report, the construction spending figures for November and the Minutes of the December 12 FOMC meeting.
The market expects the ISM to have risen marginally to 50 from 49.5 previously. The various regional surveys point in different directions. The NY Fed survey and the Chicago PMI showed quite good readings, but the Philly Fed and Richmond surveys
printed a picture of very weak activity in those regions. We suspect the Chicago PMI benefited from extreme clement seasonal (which are much less a factor for the ISM) and so are not impressed by the gains the survey showed in December. Therefore,
we put ourselves on the bearish side of consensus. If the ISM remains below 50, it would be the second consecutive month activity contracted in the manufacturing sector and should support Treasuries.
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Forex Investors Reduce USD Holdings On FOMC Minutes Release
Expectations continue to build that the Federal Reserve will pause its rates tightening cycle in August, this will result in Forex traders cutting their long USD positions.
The latest release of minutes from the Federal Open Market Committee meeting (FOMC) revealed that Fed officials are uncertain about the future interest rate direction and are concerned about short term inflation.
Forex Investors reacted to the release of minutes from the FOMC by continuing to reduce their USD holdings, this saw the Euro rise to a high of 1.2650 USD overnight from 1.2590.
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Forex – Dollar continues to suffer post-Fed fallout
The dollar (USD) continues to suffer from last week’s relatively dovish policy statement from the US Federal Reserve and a recovery in risk assets, such as equities.
Though the quarter point hike in the Fed funds rate to 5.25 pct was expected, the rate-setting Federal Open Market Committee cautioned about the outlook for growth. In response to the statement, the Fed funds futures now attach a 65 pct of another rate hike in August, down on 80 pct predicted before.
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FOMC – Softer tone, but tightening bias retained
The US Federal Open Market Committee unanimously decided to raise interest rates by another 25bp during last week monetary policy meeting, taking the fed funds rate to 5.25%. More interestingly, the statement language was a notch more dovish than expected. While the FOMC does not promise anything for the August meeting, the overall message is still that near-term monetary policy remains data dependent, the FOMC is still vigilant on inflation and has retained its tightening bias.
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Czech Interest Rates unchanged at 2.0%
The Czech central bank (CNB) kept interest rates unchanged last week for the eighth consecutive month, leaving its key policy rate at 2.00%. The decision was broadly expected, as inflation is still well contained. However, we think a restart of the tightening cycle is moving closer.
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Polish Interest Rates on hold at 4.00%
As broadly expected, the Polish central bank’s (NBP) Monetary Policy Council (RPP) last week decided in favour of unchanged interest rates, keeping the key policy rate at 4.00%.
The decision to keep rates on hold should clearly be seem in the light of the fact that inflation remains very low – below 1%. That said, the timing of the next rate hike has clearly been brought forward, mainly due to the following circumstances:
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Slovak Interest Rate Unchanged at 4.00%
The Slovak central bank (NBS) board meeting ended without any changes leaving the key policy rate at 4.00%. This was broadly expected, especially given the 50bp hike at the May monetary policy meeting.
Today’s decision probably suggests an NBS that is biding its time and waiting for more macro-data on the economy, especially inflation, before moving interest rates.
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Turkish Central Bank Raise Interest Rates to 17.25%
The Turkish central bank (TCMB) yesterday after its second emergency monetary policy meeting in just a month that it had decided to hike its key policy by another 225bp to 17.25% – more or less in line with expectations. Furthermore and equally important the TCMB announced that it plans to intervene in the FX market to prop the ailing lira.
Hence, the TCMB continues to act decisively to stop the lira from weakening and to reduce inflationary pressures. We continue to be impressed and believe the TCMB will eventually succeed and we are getting closer to stabilisation of the lira – and setting it up for a potentially strong rebound. However, the situation remains fragile even though we think we are moving towards more stability.
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US consumer confidence shows surprise gain
US consumer confidence improved in June, the Conference Board reported, surprising many analysts expecting a decline.
The consumer confidence index rose to 105.7 in June after 104.7 in May. Analysts on average had expected a reading of 103.9.
“The slight bounce-back in confidence this month was a result of the moderate improvement in consumers’ expectations,” said Lynn Franco, research director for the business research organization.
“Despite the uptick, consumers remain concerned about the short-term outlook.
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US existing home sales fall 1.7 percent
Sales of existing homes in the United States fell 1.7 percent in May from the previous month to a seasonally adjusted rate of 6.67 million, the National Association of Realtors has said.
The decline was less steep than private economists’ forecasts of 6.61 million units, but still a sign of economic cooling as higher mortgage rates dampen the housing market.
Sales of existing homes fell 6.6 percent from a year ago.
Inventories rose 5.5 percent at the end of May to 3.60 million units, which represents a 6.5-month supply at the current sales pace.
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German business confidence increase better than expected: Ifo
Business confidence in Germany has improved by a better-than-expected rate in June, underlining ongoing robust recovery of Europe’s biggest economy.
Ifo, a widely watched business climate index, said Tuesday that its index for Germany rose to 106.8 in June from an upwardly revised 105.7 in May, beating expectations.
Economists polled by the AFX financial news wire had forecast the index to dip to 105.2.
The business assessment index, which measures current conditions, climbed to 109.4 from 107.3 in May. Economists were looking for a June reading of 107.5.
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Australian Govt looking to secure Reserve Bank governor’s services
Australia’s Treasurer Peter Costello says he would like the Reserve Bank governor Ian Macfarlane to continue working with the Government once his time in the job ends.
Mr Macfarlane’s term will come to an end end in October this year.
The Treasurer would not be drawn today on just when a replacement will be named but paid tribute to the role the current governor has played.
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China’s economy to maintain double-digit growth this year
China’s economy will grow by 10.3 percent in the first half of 2006, then slow marginally for a full-year expansion of 10 percent, the central bank said in a new report.
At the same time, inflation will climb slowly, registering 1.3 percent in the first six months of the year and 1.7 percent for the 12 months, according to the report, from the People’s Bank of China’s research bureau.
The forecasts, released over the weekend and published in the Beijing Morning Post on Monday, come despite a stream of government measures aimed at slowing the economy, following growth of 10.3 percent in the first quarter.
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United Arab Emirates plan to convert 10% of Forex Reserve from Dollars to Euros
The United Arab Emirates central bank has made no decision yet on diversifying its foreign exchange reserves and the current USD ratio is appropriate, the bank’s Governor Sultan Nasser Al Suweidi said yesterday.
However, he told Reuters in an interview that a shift remains the bank’s long-term objective.
“The board is making the decision but it has not taken the decision yet,” he said on the sidelines of a conference in London.
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