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Dollar Undecided On Election, Coming Trade Report

Thursday, 08 November 2006 16:23:33 GMT  |  John Kicklighter, Currency Analyst

The preliminary election results are in, yet dollar sentiment remains mixed as the market processes the ramifications of a democratic congress and the monthly trade account looms just over the horizon.  As was the case for the majors over the previous overnight sessions, the price action leading into the New York hours was limited. 

The EURUSD fluctuated in a 25-point band for much of the Tokyo active hours.  An anti-dollar rally ran the pair up to 1.2810 sometime after London came online, but the tides turned quickly for a 65-point dollar to 1.2745.  Against the Japanese yen, the slipped to 117.40 in early trading before a firm bid ran the dollar up to resistance just under 118.05.  Similar to the action in the euro pair, the GBPUSD cross made its own 100-point swing before retracing to the middle of the range.  Finally, the early morning dollar movement sent the currency 75 points higher against the Swiss franc through the open of North American trade.  Since then however, the pair has reverted back below the 1.2500 level.

Like the previous two days this week, market moving indicators were in short supply this morning.  The only release on deck with any market-moving capability was MBA’s mortgage applications report for the week ending November 9th.  According to the report, filings for new mortgages jumped 8.8 percent in the opening week of the month, a promising sign for the beleaguered housing market.  The jump was the biggest since the surge in the final days of August.  Further from the breakdown the numbers show the refinancing index rose 11.1 percent while purchases of new loans picked up 7.1 percent.  From the overall read and the latter component gauge, housing seems to be off to a strong start for the new month.  Considered a leading indicator to the rest of the sector data, should the MBA applications continue to print in positive territory, speculation over a more robust rebound in housing could begin to form.

Aside from the lone indicator today, the event risk associated with the US mid-term election proved to be less concentrated on the exit polls themselves.  As was expected, the House of Representatives easily took the House of Representatives, already creating the political gridlock between itself and the president that domestic markets generally benefit from.  However, Congress’ ability to schedule and pass bills that could effect US growth and trade still hangs in the balance as the seats in the Senate are still unknown.  With each party looking to capture 49 seats a piece, both seats need to go one way in order to give one party a majority vote.  The currency markets will likely stand on the sidelines as the Senate structure works itself out and the new Democratic majority in the house begins to announce the policy changes that it will pursue.  Instead, currency traders will turn back to economic indicators going into the close of the week.  Thursday has horded all the week’s weighty releases.  Jobless claims, the University of Michigan’s consumer confidence read and the import price index will all stoke the fundamental means to move the dollar.  However, September’s trade account will provide the immediate reaction from the greenback ranks.  As energy prices plunged through the period, market participants will judge whether the effects on the deficit will be enough to encourage an extended rebound towards par.

Equities markets were little moved by mid-day as the various sectors awaited the outcome of the senate race before traders took on new positions.  By 16:00 GMT, all three benchmark indices were trading slightly below the open.  The Dow Jones Industrial Average was quoted at 12,148.37, the S&P 500 slipped to 1,382.11 and the Nasdaq Composite edged lower to 2,374.99.  From the top of the market movers list, pharmaceutical firm Merck’s shares slipped $1.58 for a 3.4 percent loss to $44.32.  The drop followed the companies of four separate tax disputes in the US and Canada that could account for an estimated $5.8 billion.  Elsewhere, National Semiconductors cut its financial targets on weaker shipments to cell phone makers.  National’s shares dropped 0.5 percent, or 0.13 percent to $23.82. 

Similar to currencies and equities markets, debt securities were little changed through the morning session as investors waited for the outcome of the remaining senate seats still in dispute.  Ten-year notes were trading only 1/32nd lower at 101-20 with yields adding a basis point to 4.663 by 16:00 GMT.  For the longer-termed bonds, a modest 2/32nds advance to 95-29 of face while its own yield was unchanged at 4.759.

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