Intraday Market Thoughts

Slowing Economy Pulls Down Dollar, BOJ on Tap

by Ashraf Laidi
May 20, 2011 3:20

The dollar fell in New York trading after economicdata pointed to slowing growth and Fed speakers did nothing to haltspeculation they will remain on the sidelines for the long term. The upcomingsession features the Bank of Japan rate decision.

The USD was the worst-performing major after the Philly Fedunexpectedly tumbled to 3.9 from 18.5. It was expected to rise to 20.0. Thereport emphasizes the dawn of a manufacturing slowdown in the United States butit was just one part of an overall slump in economic data on Thursday. Existinghome sales fell to a pace of 5.05m from 5.09 (exp: 5.22m) and leadingindicators declined 0.3%. On the upside, initial jobless claims improved to409K from 438K (exp: 420K).

The data kept downward pressure on USD/JPY, which bumped uptoward 82.20 before closing at the days lows around 81.50. The Fed's Evans (dove) openly doubted that the Fed would hike this year. Fisher (hawk) continued to lament QE2 but noted that today's data was disappointing. Dudley (neutral, core member) noted that headline inflation was troubling but said it was transitory and that growth needs to pick up before employment improves. Stocks closed marginally higher for thesecond day, in part due to exuberance from the Linkdin IPO.

Asia-Pacific Preview

The Bank of Japan renders its interest rate decision in theupcoming session. There is no set time, but expect the announcement around 0500GMT. The market isnt expecting any policy changes but, as we have previouslymentioned, pressure is building on officials to do more to help the recovery.Yesterdays GDP was worse than expected and put Japan back into recession.Given the current trajectory of Q3 growth the contraction is likely to last atleast three quarters. The BOJ forecasts a negative GDP through June but may notyet see any reason to alter that stance. The key takeaways will be hints andproposals about further asset buying or other more creative measures. Theycould also try to talk down the yen. Last month Nishimura called for furtherasset purchases and a key will be if he garners support from others. Itshighly unlikely that the BOJ will announce further concrete measures but ifthey do, the reaction will be sell JPY. Otherwise, look for a flat reaction orsmall bump in JPY.

By A.B. - Staff


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