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Daily Forex
Commentary
By Jack Crooks
Key Reports due Monday (WSJ)
10am: August ISM manufacturing business index. Consensus: 54. Previous: 53.8.
10am: June construction spending. Consensus: +0.8%. Previous: -0.9%.
Quotable
"All argument is against it; but all belief is for it."
- Samuel Johnson
FX Trading
Competing themes: the euro zone economy has bottomed vs the US economy finding
a second wind.
Given the relative price action last week - and on Monday morning, it suggests
the better-than-expected economic news in Europe (countering the extreme
pessimism, as we suggested in Currency Currents on Wednesday July 27), has
trumped US good news (consumer confidence and GDP). How far can this euro rally
run? The 12500 level might just shake out a few dollar bulls.
Given that view, one of our major themes of a rising US rate differential and a
surprise on how quickly said differential could grow is still in play.
Here is excerpt from Stratfor on the implications of the positive US data we
saw last week:
Strong consumer-demand growth and a white-hot housing market continue
to form the backbone of the growth, a trend which has proven true these past
two years, as opposed to the government spending which added octane to the
system in 2002. But there were two new features in the growth that should
undergird US economic strength for several more quarters. First, businesses -
which have been extremely reluctant to open their pocketbooks since the
September 11 attacks - finally joined the party by expanding spending at a 9.3%
annualized rate. Second and far more importantly, consumers actually managed to
burn through retailers' and wholesalers' accumulated inventories. US inventory
stockpiles racked up their first declines since 2003.
If Stratfor is correct, it means the US economy is gaining momentum. It could
give the Fed a green light to be more aggressive going forward.
Morgan's Joachim Fels thinks the yield differential will widen and the Fed will
catch up to the BOE by year end. Here is an excerpt from a recent posting
titled "Four-Four Two" (our emphasis):
Why 4-4-2 then? Well, 4-4-2 is where I now think these three central
banks' official interest rates will end up around the turn of the year. And
just in case you were wondering: no, I don't expect the ECB will have hiked the
refi rate to 4% by then. Most likely, rates in the euro area will simply stay
where they are, at 2%. I have given up flirting with the idea of an ECB rate
cut in the second half of the year now that the business surveys
suggest that the growth cycle is turning up again. However, as I will explain
later, I still believe that a rate cut looks more likely than a hike in the
remainder of this year. Likewise, I have thrown in the towel on my view that
the Fed would stop hiking the funds rate somewhere near the present 3.25%
level. I humbly concur with our US economists' long-held view that a 4% handle
for Fed funds at year end looks more likely. What hasn't changed,
though, is my view on the Bank of England, which has long been that rates would
be cut later this year.
For now, we continue to expect a corrective rally in the euro, and possibly the
rest of the pack. But it's a good idea to keep one eye squarely focused on the
Fed.
Jack Crooks has actively traded in global equity,
fixed income, commodity, and currency markets for more than 20 years. He is
president of Black Swan Capital, a currency and commodities market advisory
firm - BlackSwanTrading.com
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