Australian FOREX Weekly Outlook 18/07/2005

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18/07/05

FOREX – Australian Dollar Market Comment

Dollar declined last week on all majors on a weekly basis however not much should be read into this profit taking exercise which was largely fueled by fears of a record high U.S. trade deficit earlier in the week. This also fit in well with the markets plan to square back those positions which eventuated on the speculation of imminent interest rate cuts both in the Euro-Zone as well as U.K. This scenario has subsided for the zone with ECB dismissing claims of any cuts in the short term with the recent surge in inflation and pick up in economic data adding credence to their monetary policy stance. Also the way London quickly got back to its feet and got down to business was impressive and the surprise rise in inflation also led to paring back of some positions looking for a rate cut in the U.K.

However this might have been enough to stabilize the major pairs for now and prevent sharp falls but it may not be enough to help it gain against the Greenback. And soon Dollar’s growing high yield as well as continuous out performance of its fundamentals, which is keeping the broad sentiment in the Greenback’s favour, should lead the Dollar to maintain its rally. The initiative was seized back on Friday with robust manufacturing and production data dispelling fears of a slowdown in this sector. In spite of sky high oil prices, the colossal appetite of American consumers is unlikely to decline and their consumption power would outstrip other regions.

A supporting factor for oil prices to remain at high levels has been refusal of demand to die down which is giving more confidence to speculators to push prices higher. But what it does do is curb spending in non essential items which are more likely to be imported Japanese products. Exports for Japan have declined significantly which is leading to an increased dependence on domestic demand to keep the economy on its slow recovery path. But as the continuous stream of weak to average data has shown, consumer confidence is failing to pick up. This has terrible implications for Japanese economy in the months to come but it is hoped that the pick up in U.S. growth would translate to an increased demand for Japanese goods.

Interesting price action is likely in the Yen in the coming months with U.S. administration declaring that China is set to move on the Yuan revaluation issue in August. So far the market is treating this news as the ‘boy who cried wolf’ story as many have burnt their fingers on previous such speculation. But this fits in well with the Chinese administration’s plan of preventing speculators from taking advantage of this eventuality. They would rather move on revaluation at a time when few people are expecting it to happen than the other way around.

A few crucial tests for the Pound lie mid week with the minutes of BoE’s meeting as well as Retail Sales; these are potential market moving events with all eyes on the amount of members that voted for a rate cut, an increase from the previous meeting’s two members in favour of a cut or a below par retail sales outcome would accelerate losses for the Pound.

A major test for the Dollar comes early in the week on Monday with Capital Inflow data, expectations of a healthy rebound due to the increased purchase of U.S. assets, which given the recent pickup in the economy, have become more attractive. While mid week the minutes of Fed’s meeting is expected to have hawkish tones to it. Thus the Dollar should maintain its bid tone and strengthen further and it would be a surprise if that doesn’t happen.

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