Commodities Sell-off Shadows Worrying TICS Report

By: Ashraf Laidi | Tue, May 16, 2006
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Net foreign capital flows into the US fell 23% to $69.7 bln in March from a revised $90.5 bln in February (initial was $86.9 bln). The $69.7 bln in net capital flows was modestly above the $62.0 billion trade deficit for the same month.

The figure matched our forecast of $70 bln and paved sufficient in maintaining today's dollar rally, which was already emerging in early European trade as a result of the commodity-wide sell-off.



Passive dollar rally

Today's dollar rebound was largely a product of the broad pullback in metals and energy prices rather than a revision of the dollar's fundamentals such as higher probabilities of a June tightening. This week's flurry of speeches from Federal Reserve officials including Chairman Bernanke as well as the release of the US April CPI report could provide some temporary stability to the dollar in the event that hawkish remarks and high core CPI raise speculation of a June rate hike. We estimate that a key component in shaping the fate of the June FOMC meeting will be next week's releases of the new home and existing home sales reports. We think the Fed has made its last rate hike of the year, and see a 50% chance of a rate cut in December.

We see chances of a dollar advance to be more concrete against the euro this week than against the Japanese yen, which is currently fueled by discreet attempts from the Bank of Japan to reduce liquidity from the current 16 trln yen in current deposits available to commercial banks to a desired 10 trln yen.



Ashraf Laidi

Author: Ashraf Laidi

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