» Asian Morning Update 21st April 2008

The Dollar continues its bottoming pattern

European releases from Friday:

February                                     Forecast   Actual
Italian Industrial Orders     (MoM)    - 0.5%    +2.0%
Italian Industrial Orders      (YoY)    +5.2%    14.3%
Italian Industrial Sales       (MoM)   - 1.0%    +0.8%
Italian Industrial Sales        (YoY)                 +9.0%

March
U.K. PSNCR                         GBP   18.0bn     12.7bn
U.K. PSNB                           GBP     7.8bn     10.2bn
U.K. M4 Money Supply        (MoM)   +0.5%     +0.8%
U.K. M4 Money Supply         (YoY)   11.6%     12.0%
U.K. M4 Sterling Lending      GBP    15.0bn     11.7bn

The Italian industrial orders and sales were good numbers given the recent downbeat sentiment and overall looking at the industrial performance of the Euro-zone as a whole it does seem to point quite firmly to a solid Q1 GDP.

As ECB officials have painfully pointed out the downside risks remain but are probably more of an unknown nature which will be difficult to predict if and when a major shock may arrive. Until then, while growth is slowing, it does appear to be a very mild slowdown with the only concern being persistently high inflation which is again an area of constant comment.

States news from Friday:
     
Friday was overall a quiet day for economic releases with nothing on the slate from the States. This just left comments and articles to read and wile away the last few hours of the week.

The Times reports that Morgan Stanley is forecasting that 10% of U.S. house owners are facing negative equity if the other prediction of a 15% fall in house prices comes about. That equates to 1.2mn home owners – a level not seen since the early 1990’s. This places a drag on consumer spending and would restrain any recovery in the initial stages.

And at last we have a Fed official grasping the fact that slower growth may not equate to lower inflation. He pointed out that the real fed funds rate, or the actual rate minus the expected rate of inflation, is negative for the first time since 2003-2004.

He even went further to warn that seeing rate cuts as a solution to most economic ills was a dangerous misconception. “To ensure the credibility of monetary policy, we should never ask monetary policy to do more than it can do,” he said, “The role of monetary policy is to ensure the stability of the purchasing power of the nation’s currency, so that markets are not distorted by inflation.”

And the Dollar rose strongly on Friday, ahead of expectations but in some ways doesn’t surprise me too much.

Does this mean that the Dollar has seen its lows for the year? Well, yes and no.

Certainly against the Swissie and Pound - most definitely. Against the Yen probably not with a move lower still to be seen in July. Against the Euro? Well that one is still up for grabs. I’d put a 60% chance on having seen the high here but given the level at which it stalled there is also the chance that we’re seeing a more complex correction. In that case we’d expect a decline into 1.5510 again, possibly just below but from there a rally to marginal new highs before finally peaking.

The argument against this complex correction is that they normally occur in a strongly directional market and would therefore imply strong gains above 1.5987. However, long term targets imply the 1.5940-60 area which have obviously been achieved and thus I’d put that stronger chance of having seen the peak already. Performance around the 1.5510 corrective low will be key here.

Even if I am correct I wouldn’t expect an outright rally at this point because the fact that I see a new Dollar low against the Yen around 90.80 in July. It would really fit into the fundamental reaction where the market still cannot give up on a bearish Dollar.

That decline into July (on the assumption that Dollar-Yen and Dollar Europe are correlated) is therefore likely to be quite deep but not quite reach current lows.

While the technical picture has been quite clear, trying to explain Friday’s Dollar strength fundamentally is less clear. (I have to say that is normally because technicals lead fundamentals.)

If anything we have to remember that as we approach the half-year with fiscal stimulation checks being issued next month, signs that U.S. exporters are benefitting from a lower Dollar and a greater awareness of risk in Europe as well, the argument to reduce Dollar short positions is quite strong.

It doesn’t argue a long Dollar position just yet – and that is why a decline into July is distinctly possible. By then the market will become frustrated that the fiscal stimulus will not appears to be having any affect and will be gunning for the Dollar again.

This week should see the Dollar following through on the upside but I suspect it will not be excessive bullishness.

More later once the daily analysis has been done…

The following releases are due from Asia due today:

Australia
Q1 PPI                              (QoQ)    +1.0%
Q1 PPI                               (YoY)    +1.0%
March New Vehicle Sales      (MoM)     -2.3%
March New Vehicle Sales       (YoY)    +3.1%

Japan
February Tertiary Index       (MoM)    - 0.5%
February Leading Economic Index (F) 54.5%
February Coincident Index (F)           70.0%
March Convenience Store Sales (YoY) 

U.K.
April Rightmove Houses Prices

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This entry was posted on Monday, April 21st, 2008 at 1:37 and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.