Going Forward, This Is Key

  • September 9, 2004
  • Dave Floyd


FX traders collectively wringed their hands again
yesterday as policy statements threw cold water on widely held
positions/analysis.  Greenspan’s statement, see below, seems to have been the
key piece that indicated that rate policy may not be so clear cut now.


“Despite the rise in oil prices through mid-August, inflation
and inflation expectations have eased in recent months. To be sure, unit labor
costs rose in the second quarter as productivity growth slowed from its
extraordinary pace of the past two years
and employee compensation per hour remained on an upward trend. But, as
best we can judge, the
growth in profit margins of non-energy, non-financial, corporations, which, at
least from an accounting perspective, had contributed significantly to price
pressures earlier, has recently slowed. 
Moreover, increases in non-oil import prices have lessened–a development
that, coupled with the slowing of profit-margin growth, has helped to lower core
consumer price inflation in recent months.”

And so it
is, FX traders are now back in front of their terminals determining the best
course of action to take.  What might be key going forward are some “new”
correlation trades, in this case oil and deficits, which Greenspan cited as
major impediments to growth.  With Friday’s release of the July Trade
Balance, it is the next piece of data that can offer us traders some clues.

We closed
our short EUR/USD position on these comments and took only a 15 pip loss versus
the original stop loss at 1.2200.  The tape after the release of the text was
simply too obvious to ignore.

Meanwhile,
the RBNZ decided, as widely anticipated to raise rates by another 25 bp’s.  What
was somewhat unexpected was the accompanying statement:


“further tightening of monetary policy is likely to be required.”

This
statement varies in two ways, first, the tool of choice is still “monetary
policy” not

“interest
rates” as mentioned in the June meeting.  This statement also mentions,
“required” versus “necessary”.  Naturally, tightening via monetary policy can
entail the

currency simply appreciating rather than simply raising rates.  While this may
sound like a lot of hair splitting and semantics, it does offer clues;
unfortunately, the clues lead to more questions than answers.

Technically
the NZD/USD has been holding in relatively well overall in recent sessions.  The
daily is beginning to show some upward momentum and the weekly oscillators we
monitor are beginning to firm up too.  We would like to see a break above .6600
in order to bring us in the market on the long side.  Under ideal conditions,
.6800 would be attained.

 



















 


Technical Points:

GBP and NZD
longs are looking decent on short-term models, but risk/reward is still not
there.  Price action seems set to go sideways ahead of Friday’s trade data.

As always, feel free to send me your
comments and questions.

Dave