TALK FROM TRENCHES: EARTH AWAITS AUG 24; WEAK DOLLAR DANGERS
By Isobel Kennedy
NEW YORK (MktNews) - U.S. Treasuries are just a touch better Thursday but once again volume is limited. The entire focus for the U.S and, as it appears, the rest of the world is next week's FOMC meeting. Ongoing dollar weakness is also a major concern for the capital markets.
Treasury prices are expected to stay in a narrow range, trading sideways or seeping a little lower until the FOMC is out of the way. Many expect a relief rally to materialize after the meeting is over, even if the Fed actually does raise rates 25 bps.
The dollar fell to an eight-month low of Y111.25 in overnight trade and then got hit down to another eight-month low around 110.70 after the shockingly high U.S. trade deficit was reported Thursday morning. And Treasury sources worry the long bond could get beaten down if the dollar falls below the Y110.00 level.
The U.S. June trade deficit widened to -$24.6b in June. It was another record. June imports rose on jumps in capital goods, mostly in computers and consumer goods like apparel and gems. Imports show a robust consumer and possibly some Y2K preparations.
Some analysts say that prior to today, dollar weakness was largely driven by external factors ... Japan economic recovery, strong buying of Japanese stocks from European accounts and repatriation of yen for the fast approaching Japan fiscal half-year on September 30.
What are the repercussions of this weaker dollar? Analysts are now talking about how much the June trade deficit will trim from 2Q GDP. In the prior GDP estimate of +2.3%, trade cut 0.75% from growth. With this deeper June deficit it will cut about 1.25% and perhaps put GDP under +2%, they say.
That of course is good for bonds and might even argue against a robust Fed tightening, analysts say. Then again, a lower dollar might help U.S. exporters, especially as economies around the world get back on the road to recovery.
But one strategist points out that volatility in the dollar has often been linked to influences on the bond market. With foreign investors recently shying away from Treasuries he says it is appropriate to consider the effect on other asset classes such as stocks. In May, net foreign investment in U.S stocks was $8.5 billion but in April it set an astounding record of $17.5 billion. Year over year, net foreign investment in stocks is about $50 billion. While that is down from the peak of $91 billion in March 1998 it is still healthy, he adds.
Some analysts think the weak dollar will become a problem for the U.S if it negatively impacts American equity markets. But if you think it would prevent Greenspan from tightening, think again. How many times has he told the world he thinks U.S. stocks are overvalued? In fact, some economists are of the school that a weak dollar is actually a reason for tightening due to the inflationary implications.
There have been no rumors in the foreign exchange market about BOJ and possibly U.S Fed intervention today. But sources in the U.S Treasury market seem surprised the BOJ has not tried to prop up the dollar. Perhaps they have abandoned their recent intervention strategy. Afterall, many Japanese officials now say it is not the answer to yen strength.
Speaking of the entire world being on FOMC watch, here is a good one: Kyodo reported Thursday that a Japan MOF official is joining the ranks of people awaiting the outcome of the FOMC. While a Fed hike is well anticipated, a larger than expected rise could lead to dollar-buying, the official says. If authorities stepped in to sell yen at that time they would arrest the yen's appreciation. Kyodo concludes that this suggests Japanese authorities will coordinate with their U.S. counterparts to intervene. Interesting!
And where have President Clinton and Treasury Secretary Summers been during the dollar slippage? Lawrence is on vacation and Bill heads off to Martha's Vineyard today. Guess they're not concerned. But the market wonders if Summer's "strong dollar" policy isn't just a little weaker than Rubin's "strong dollar" policy.
Net to net, the foreign exchange market remains skittish and any time the dollar blips off a bottom, players wonder if there will be intervention at some point. Keep in mind, the BOJ or the Fed could intervene by going directly through dealer banks or through the electronic brokering system. In either case, the names of the counterparties are not revealed until a transaction is completed and then only to the parties involved. "Confidentiality" says a dealer will not reveal the name of a counterparty ... but hey this is Wall Street!
In other matter, the Financial Times today reported as fact the same rumor that swirled through the financial markets several weeks ago ... that Goldman Sachs incurred a loss of some $100 million on its London swaps desk. Goldman did not comment, but the FT said Goldman suffered the loss when the spread between LIBOR caps and swap options unexpectedly widened, pumping up volatility in the process.
Chinese press reports that 117.4 billion yuan ($110 billion) in tax revenues has been misused by the Chinese Finance Ministry and the provincial treasuries may be par for the course. But what is the world coming to when The New York Times reports that the Bank of New York may have been used by Russian organized crime to launder up to $10 billion in funds since early last year! Dennis Pettit and Joe Plocek contributed
NOTE: Talk From the Trenches is a daily compendium of chatter from Treasury trading rooms offered as a gauge of the mood in the financial markets. It is not hard, verified news. |
