US Dollar, Japanese Yen Rally as US Equities Reverse - US Consumer Confidence Could Disappoint on Tuesday

US Dollar, Japanese Yen Rally as US Equities Reverse - US Consumer Confidence Could Disappoint on Tuesday
The US dollar and Japanese yen made headway against many of the majors, as risk aversion triggered sharp declines in US equities. Indeed, the DJIA and S&P 500 started the day on a strong note, only to reverse from their intraday highs and close down over 1 percent. From a technical perspective, EURUSD broke down from a rising trend channel (daily charts) and EURJPY plunged following a test of the 2009 highs, which brought daily RSI down from overbought levels. All told, the moves may signal an important turn, at least on a short-term basis. Looking to the day’s news, the Chicago Fed’s economic activity index unexpected slipped for the third straight month in September to -0.81, indicating a further deterioration in growth and inflation pressures. On the other hand, the Dallas Fed’s manufacturing activity index edged up to a 2-year high of -3.3 in October from -6.4, as producers have benefited from the rising foreign demand spurred by the weak US dollar.

The October reading of the Conference Board’s measure of US consumer confidence is expected to edge up to a reading of 53.5 from 53.1, but overall, there are some downside risks for this report. Indeed, the preliminary reading of the University of Michigan’s consumer confidence index show that sentiment deteriorated more than anticipated in October, with the index falling to 69.4 from 73.5. A breakdown showed that as the “economic conditions” component slipped to 72.1 from 73.4, while the “economic outlook” dropped to 67.6 from 73.5. Overall, disappointing numbers could have especially negative repercussions for risk appetite, but if the index rises in line with expectations or proves to be surprisingly strong, FX carry trades could gain and weigh on the US dollar.

Related Articles: US Dollar Weekly Trading Forecast, US GDP, RBNZ Rate Decision to Headline Event Risk for FX Trade Next Week

Euro Breaks from Rising Channel as German Consumer Confidence Deteriorates
The euro came under pressure at the start of the week, with EURUSD breaking down from a rising channel formation and EURJPY plunging following a test of the 2009 highs, which brought daily RSI down from overbought levels. European data was modestly disappointing, as German consumer confidence unexpectedly deteriorated in November, according to GfK, as their index slipped to 4.0 from 4.2. A further breakdown of the report showed that while economic outlooks improved, income expectations and willingness to buy worsened, suggesting that individuals see recovery on the horizon for the economy as a whole, but not necessarily for themselves. Meanwhile, European Central Bank governing council member Christian Noyer said that the "impressive" quarterly profits made banks may be giving "the impression that the financial sector has recovered its balance and that no further reforms are necessary." However, Noyer expressed pessimism on that prospect, saying, "Nothing could be further from the truth” as there is a risk that a "business-as-usual mentality" will emerge, making the "incentives to reform...weaker and the opposition stronger. It is essential that we keep up the momentum.”

Related Article: Euro Weekly Trading Forecast

Australian Dollar Declines Could Continue If Australian Consumer Prices Weaken
The Australian dollar fell sharply against the US dollar, British pound, and Japanese yen as risk aversion plagued the high-yielding currency and data showed that producer prices in Australia rose less than expected during the third quarter as the steep appreciation of the Australian dollar brought down import costs. The quarterly index increase by 0.1 percent, the first increase since the fourth quarter of 2008, while the annual rate slumped to 0.2 percent, the lowest reading since recordkeeping began in 1999. With pipeline inflation pressures looking very weak, there is potential for the release of Australian consumer prices on Tuesday to be much weaker than expected.

Australia's headline consumer price index is forecasted to have risen 0.9 percent during Q3, bringing the annual rate down to a 10-year low of 1.2 percent from 1.5 percent. However, the Reserve Bank of Australia’s core measures are projected to hold at more robust levels on an annual basis, with the trimmed mean anticipated to slip to 3.2 percent from 3.6 percent and the weighted median forecasted to slip to 3.7 percent from 4.2 percent. Such moves would tell us that prices for volatile items like energy are responsible for the steep drop in headline consumer prices, and unless the core measures plunge, the markets are likely to remain in favor of additional rate hikes by the Reserve Bank of Australia. In fact, Credit Suisse overnight index swaps are full pricing in a 25 basis point increase by the RBA during their next meeting on November 2, and stronger-than-expected consumer prices could further this sentiment and send the Australian dollar higher. However, if consumer prices are markedly weaker than anticipated, the Australian dollar could continue to reverse from its 2009 highs.

British Pound Holds Its Own in Day of Consolidation
The British pound held its own on Monday, gaining against every major currency except the US dollar, though GBPUSD did manage to hold above support formed by the 50 SMA at 1.6264. There was little in the way of news, though there were some comments from Bank of England Monetary Policy Committee (MPC) member Adam Posen which added to evidence of discord between the central bank and the government, as he said the UK should restructure banks in order to spur competition. Posen also said that there are signs that the UK economy is recovering, and that there’s no evidence that the BOE’s quantitative easing (QE) program will spur inflation.

Since the release of Q3 GDP last Friday, which showed that the UK did not emerge from recession, and instead, contracted for the sixth straight quarter by -0.4 percent, the markets have gone on to price in a slight chance of a 25 basis point rate cut by the BOE during their next meeting, while expectations for rate increases over the next 12 months have fallen to 87.7 basis points from 93.4 basis points last Thursday. All told, these projections may put the BOE under greater pressure to consider expanding their QE program during their next policy meeting, which would have very bearish repercussions for the British pound.

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Written by: Terri Belkas, Currency Strategist for DailyFX.com
E-mail: tbelkas@dailyfx.com