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100 Percent Chance of a Rate Cut by October?

Thursday, 01 March 2007 22:05:28 GMT  |  Kathy Lien, Chief Strategist

The US dollar strengthened today, but if you ask anyone trading the currency market, they will tell you that it certainly doesn’t feel that way.  The market’s primary focus is on the Japanese Yen, which has once against skyrocketed against everything in sight and reigniting talk of carry trade liquidation in the process.  The Yen is now trading at a fresh 10 week high against the US dollar.  The Dow, after having opened down over 200 points, staged a very impressive intraday rally that took it into positive territory, but for no more than a blink of eye before the index turned back into the red.  For those able to peel themselves away from the big moves in the Yen, they would have noticed that the dollar strengthened against every other major currency pair.  The most meaningful appreciation was against the New Zealand dollar, Australian dollar and the Euro.  A dose of stronger US economic data has helped to stabilize the dollar and delay the market’s expectations for an interest rate cut by the Federal Reserve.  Right now Fed Fund futures are pricing in a 100 percent chance of a quarter of a point rate cut by October. Earlier this morning, the market was showing a 100 percent chance of a cut by August.  To the surprise of the market, personal income, personal spending, personal consumption expenditures and the ISM manufacturing survey all came out stronger than expected this morning.  Both the Chicago PMI and Philly Fed index failed to correctly forecast the directional improvement in the ISM.  On balance, these reports indicate that inflation is ticking higher and that certain parts of the US economy may not be weakening as significantly as some people may have initially thought.  Although we could see a rebound in both the Dow and USD/JPY tomorrow given the lack of any meaningful US data, it will be difficult for either to recapture the losses that they have incurred this week.  In fact, the longer term trend in both could still be downwards.  The only piece of US data on the calendar is the final University of Michigan Consumer Confidence survey for the month of February.  The problems that that the market was concerned about on Tuesday are still the problems that they will have to face in the weeks or months to come.  The sub-prime lending market is at a tipping point, which will keep US investors very cautious.  

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