daily brief

Dollar Gains As Japanese Officials Show Support , Will A Rise in Consumer Confidence Add To Bullish Sentiment?

Friday, 12 June 2009 09:57:54 GMT  |  John Rivera, Currency Analyst

The Euro has traded heavy throughout overnight trading reaching as low as weak fundamental data add to a pull back in risk appetite. Indeed, industrial production for the Euro-zone fell by 1.9% in April which was far greater than the -0.4% which was expected.

Talking Points
•    Japanese Yen: Weakens As Officials Show Support For Dollar
•    Pound: Fisher Cautions Of Future Challenges
•    Euro: Industrial Production Falls By Record Amount
•    US Dollar: U of M Consumer Confidence On Tap

Dollar Gains As Japanese Officials Show Support , Will A Rise in Consumer Confidence Add To Bullish Sentiment?

The Euro has traded heavy throughout overnight trading reaching as low as weak fundamental data add to a pull back in risk appetite. Indeed, industrial production for the Euro-zone fell by 1.9% in April which was far greater than the -0.4% which was expected. The monthly decline dragged the annualized rate to -21.6% which was the most on record. Meanwhile, prices continue to fall in the region as French CPI turned negative for the first time since record keeping began in 1996 with a -0.3% Y/Y reading. The German wholesale price index added to the story as it dropped by 8.9% which was the most in 22 years. The ECB has forecasted that inflation will turn negative for the region over the coming months but will start to move back toward its 2% target by the end of the year.

A look at the breakdown for the region’s output shows that a 4.0% reduction in energy led the decline followed by a 2.7% fall in capital goods. We could see the energy numbers reverse as rising oi prices will begin to inspire producers to take advantage of potential rising profits. However, the drop in capital goods will weigh on any hopes for a rapid recovery for the economic union. Also, a 26.7% reduction in durable consumer goods on a yearly basis underlines the depth of the retrenchment by consumers and we may not see prior levels of consumption return for sometime. The 20-Day SMA remains supportive for the pair at 1.3984 which has negated the possible head & shoulders pattern that we were looking to see develop. Therefore, the longer term bullish trend remains strong and until we see a break below the technical level we will look for more gains from the single currency.

After reaching as high as 1.6600, the sterling has started to see some profit taking as bulls recognizing the broader dollar strength gave up the fight for the time being. BoE committee member Paul Fisher acknowledged that the U.K. is seeing signs of recovery but policymakers shouldn’t become complacent as “there are likely to be bumps in the road ahead, with many twists and turns.” Nevertheless, the quantitative easing measures by the government have continues to help boost liquidity in the markets which is helping the housing sector recover and leading to a pick up ion output. The 6/10 low of 1.6241 is the most likely point for a reversal, but a break below there could see a test of the 20-day SMA at 1.6075 before a return of bullish sentiment.

The dollar has been well bid through overnight trading across the board as Japanese Finance Minister Kaoru Yosano said his nation’s confidence in U.S. debt is “unshakable” and that the currency’s global status is safe. Despite rhetoric from countries such as Russia calling for the end of the dollar as the world reserve, the safety and liquidity of U.S. Treasuries will make it difficult for them to find an adequate substitute at this time. It will take a conscious global effort to achieve this and given the rate that initiatives of that magnitude take, it could be sometime before we see a suitable alternative developed. Meanwhile, the University of Michigan consumer confidence survey will provide the only significant event risk for the day as it is forecasted to improve to 69.5 from 68.7 which would be the highest since last September. It has been rising optimism which has bolstered demand for risky assets and another uptick in consumer sentiment should add to the theme. Therefore, we could see greenback weakness on the pick up in risk appetite as traders look to buy assets that will benefit from an increase in domestic demand . However, we must continue to monitor that relationship as we go forward and be aware that positive fundamental data will begin to generate bullish dollar price action.

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To discuss this report contact John Rivera Currency Analyst: jrivera@fxcm.com


 

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