US Dollar, Japanese Yen Mixed as Dubai World Concerns Fade - ISM Manufacturing on Tuesday
The US dollar took a beating while the Japanese yen made headway against other low-yielding currencies as the markets consolidated Friday’s moves. This price action came as concerns surrounding the credit risks stemming from the potential default of Dubai World abated. Meanwhile, a variety of US manufacturing indicators suggest that Tuesday’s release of ISM Manufacturing could be surprisingly strong. Indeed, the Chicago Purchasing Managers’ Index (PMI) unexpectedly rose to a 15-month high of 56.1 in November from 54.2, the NAPM-Milwaukee index jumped to 57.0 in November from 50.0, and the Dallas Fed Manufacturing index rose by 0.3 percent, marking the first increase in just over 2 years. A breakdown of the indices showed broad gains in prices paid and new orders, but the similarities end there. In Chicago and Milwaukee, the employment components improved but only the latter rose above 50 – the point of neutrality – to signal an expansion. In Dallas, the employment component slipped to a 3-month low.
Looking to Tuesday’s releases, Bloomberg News projects that ISM Manufacturing will slip to 54.8 in November from a more-than 3-year high of 55.7. Even with the decline, though, such a result would signal the fourth month of expansion for the manufacturing sector, as export demand has improved with global growth. However, a sharper-than-expected decline has the potential to trigger the selling of risky assets, such as carry trades and equities. Additionally, US pending home sales are projected to fall for the first time since January at a rate of 1 percent for the month of October. Since the Federal government extended the homebuyer tax credit program through April 30, 2010 and lifted the income ceiling to $125,000 for single taxpayers, there are upside risks for US housing reports through the start of Q2 2010.
Related: Discuss the US Dollar and Japanese Yen in the DailyFX Forum
Australian Dollar Up Ahead of Expected RBA Rate Hike - Statement Will Determine Price Action
The Australian dollar was the strongest of the majors on Monday, which was partially the result of an overnight rally in risky assets and partially due to market expectations for a rate hike by the Reserve Bank of Australia at 22:30 ET tonight. That said, market expectations have been tempered in recent days amidst concerns about the possible impact of Dubai World’s potential default, with Credit Suisse OIS rates pricing in a 60 percent chance of a 25 basis point rate increase by the RBA overnight, from a 76 percent chance last Wednesday. Nevertheless, RBA deputy governor Ric Battellino issued hawkish comments early last week saying that the Australian economy has entered a “new upswing” and that it’s “reasonable to assume we will see this growth extended for a few more years yet.” The RBA has already been one of the most aggressive central banks as the world’s biggest economies show signs of emerging from recession as they have hiked interest rates twice this year by a total of 50 basis points to 3.50 percent, and keeping Battelino’s comments in mind, another rate increase is likely on the way, which may contribute to additional Australian dollar strength. However, the currency’s gains could easily be muted if the RBA’s policy statement signals a cautious or neutral bias, as Credit Suisse OIS rates are pricing in 127 basis points worth of rate increases over the next 12 months.
Related: Discuss the Australian Dollar in the DailyFX Forum
Euro Shrugs Off First Increase in Annual CPI in 7 Months
The euro didn’t show much of a response to news from Eurostat, which indicated that the Euro-zone’s consumer price index (CPI) rose 0.6 percent in November from a year ago, marking the first increase in seven months. The data suggests that the region may end the year with mildly positive inflation growth, though it will be well below the European Central Bank’s 2 percent target. Credit Suisse overnight index swap (OIS) rates didn’t show a sharp response either, though they did shift slightly to price in 85.4 basis points worth of hikes by the ECB over the next 12 months, compared to 84.1 basis points on Friday. Though a breakdown of the index wasn’t available, the overall rise was likely the result of oil prices, which have risen substantially from a year ago, but this means that broad based demand for consumer goods probably didn’t have much of an impact.
Related: Discuss the Euro in the DailyFX Forum
Canadian Dollar Gains as Q3 GDP Rises for First Time in a Year
The Canadian dollar was the second strongest of the majors on Monday, despite some disappointing economic news out of Canada. The annualized rate of Q3 GDP for the nation was weaker than anticipated at 0.4 percent, as Bloomberg News had been calling for a 1 percent increase. Nevertheless, this represents a sharp improvement from Q2 and Q1, when GDP tumbled 3.1 percent and 6.2 percent, respectively. Furthermore, this is the first positive reading since Q3 2008. That said, the Bank of Canada’s projections for Q3 had been for 2 percent annualized growth, which may suggest that the central bank’s expectations for growth in 2010 could be downgraded. This has the potential to hurt interest rate expectations, and thus, the Canadian dollar.
Related: Discuss the Canadian Dollar in the DailyFX Forum
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Written by: Terri Belkas, Currency Strategist for DailyFX.com
E-mail: tbelkas@dailyfx.com
DailyFX provides forex news on the economic reports and political events that influence the currency market.
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