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Daily Forex Strategy Briefing

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Dollar Rallies on US Growth Optimism

Thu, May 29 2008, 23:17 GMT
by Hans Nilsson

CMS Forex

Dollar Rallies on US Growth Optimism

• The greenback rose on Thursday as the US Q1 2008 GDP grew at a faster pace than initially estimated and US 10-year yields rose to a 5-month high. The dollar was also supported by Federal Reserve Bank of Dallas President Richard Fisher’s comment last night that the Fed will raise interest rates if inflationary expectations deteriorate further. Sterling declined on further signs of falling UK house prices. The yen and Swiss franc fell as increased risk appetite renewed demand for carry trades. The Canadian dollar was marginally higher as Canada’s current-account surplus widened more than expected. The Australian dollar fell on new signs of weakness in the Australian economy as capital spending unexpectedly declined.


• The USD/JPY reached a 3-month high as US stocks gained and crude oil tumbled, brightening the outlook for the US economy. The pair is testing the important 106-area resistance. Strongly correlated with the US equity market, the USD/JPY faith depends on whether the last few days’ equity gains will continue. Important resistances exist in the 106-area and 108-area. If those are penetrated, the pair (and stock market) will rally.

Financial and Economic News and Comments

US & Canada

• The US Q1 2008 real gross domestic product grew at a seasonally adjusted 0.9% q/q annualized rate and rose 2.5% y/y, the Commerce Department said in the Q1 GDP second estimate. The largest upward revisions were for net exports, which added 0.8 points to real GDP growth rather than the original estimate of 0.2, and business construction, which was flat in Q1 versus the preliminary estimate 0.2 subtraction from growth. The largest downward revision was to inventories, which subtracted 0.8 points from growth rather than the original estimate of 0.2. However, the lower inventories will be positive for Q2 GDP.

• US initial jobless claims rose 4,000 to 372,000 after seasonal adjustments in the week ended May 24, the Labor Department said. The four-week average of new claims fell by 2,500 to 370,500. Continuing jobless claims increased 36,000 to 3.104 million, the highest level since February 2004. The underlying trend in initial claims is still upwards and the trend in the continuing claims shows weakness in the labor market. Overall, the numbers are consistent with a mild recession.

• “If inflationary developments and, more important, inflation expectations continue to worsen, I would expect a change of course in monetary policy to occur sooner rather than later, even in the face of an anemic” economy, Federal Reserve Bank of Dallas President Richard Fisher said yesterday in a speech in San Francisco.


• Canada’s current-account surplus widened more than expected to C$5.56 billion ($5.65 billion) in Q1 2008, compared with a revised C$778 million surplus in Q4 2007, Statistics Canada reported. The surplus in trade in goods grew to C$13.4 billion, the largest since Q2 2007, as oil and natural gas prices surged.

Europe

• Sales conditions in UK improved in May after a sharp fall in April although overall conditions remain difficult, the Confederation of British Industry reported in its distributive trades survey. The report showed 28% of respondents saw sales volumes rise compared with last year, while 42% said they had fallen. The resulting net balance of -14% is better than April’s -26%. Retailers are more optimistic regarding expected sales volume, which rose to 6 from -15. Orders and business situation improved in May but remains negative at -23 and -17, respectively.

• UK house prices fell 2.5% m/m, meaning average prices dropped 4.4% y/y, the Nationwide, the UK’s biggest building society, said. It was the seventh consecutive monthly decline, the longest falling run since the early 1990s.


• German unemployment unexpectedly rose 4,000 in May to 3.31 million, the Federal Labor Agency said. This is the first rise in unemployment since January 2006.

Asia-Pacific

• Australia’s capital spending unexpectedly fell 2.5% q/q to A$20.60 billion ($19.81 billion) in Q1 2008, seasonally adjusted, following a revised 7.3% q/q rise in Q4 2007, the Australian Bureau of Statistics said.

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Published on  Thu, May 29 2008, 23:24 GMT