·
Carry Versus Growth Will be the
US Dollar’s Next Battle
·
British Pound Continues to Soar on Strong
Data
·
Japanese Yen Firms Ahead of BoJ Monthly
Report
US Dollar –
The market has been very quiet today
but traders should not lose sight of the fact that last week marked a major
turning point for the
US dollar. After slowly strengthening since the
month of
August, the uninteresting changes that the Fed made to their FOMC statement last
Wednesday led to extremely interesting price action in the currency market. The US
dollar saw its longest stretch of weakness since July and for the most part, the
weakness continued into the new week. Although the greenback rebounded against
the Euro and Canadian dollar, it extended its sell-off against the rest of the
majors. This morning’s US data was hardly helpful as weaker
growth in spending was offset by stronger growth in income. The problem is that economic growth is
at risk while the inflation outlook is unclear. Even though core consumer prices
increased strongly in the month September, core PCE and the price index
in the third quarter GDP report fell short of expectations. Even today’s annualized PCE
deflator increased less than expected despite a revision to last month’s core
PCE month over month number. The
Federal Reserve is on hold at the moment and not likely to move until next year
at the earliest. This means that
going forward, it will be a matter of carry versus growth. The US’ 5.25 percent interest rates are still very
attractive, which could bring carry trades back into style, but if US data
indicates that growth is taking a major turn for the worse, the market’s
projections for a rate hike may become too much for the US dollar to handle. Meanwhile despite today’s quiet price
action, this is a big week in the currency market with the G7 countries
releasing a tremendous amount of data.
In the US tomorrow, we are expecting
consumer confidence along with the Chicago PMI report. Given the weakness in industrial
production, Philly Fed and ISM, the Chicago PMI report is expected to drop and even
if it manages to rise, the strength will probably be shrugged off as other data
suggests weakness in the manufacturing sector nationwide. The Conference board’s
consumer confidence reading however is predicted to be strong after last
Friday’s rise in the UMich consumer confidence survey.
Euro and Swiss Franc –
In
contrast to its global counterparts, the Euro did not manage to extend its
strength against the US dollar. Economic data was decent with the French
business survey rising 4 points to 17 and unemployment dropping by 20k, bringing
the jobless rate down from 9.0 percent to 8.9 percent. The weakness in the EUR/USD can be
mostly attributed to earlier EUR/JPY selling. The 150 level has proven to be staunch
resistance in the pair and traders have been adamant about keeping it below that
level. There is a ton of Eurozone
economic data due for release tomorrow with German retail sales as the
highlight. After stagnant consumer
demand in August, a revival is expected for the month of September. The Eurozone economy is doing well for
the most part, which will keep the central bank on track to raise interest
rates. There has been no news out
of Switzerland. However, for those who listened to the
Swiss Finance Minister’s comments last week about the Franc needing to
strengthen against the Euro, awards were doled out in the form of profits. EUR/CHF fell for three consecutive days
which was its longest stretch of weakness since mid September. There is no data due for release from
Switzerland until Wednesday.
British Pound –
The
British pound easily took out the 1.90 level against the US
dollar to register gains for the fourth consecutive trading day. Economic data continues to print strongly
which is fueling the recent strength in the currency pair. Housing market indicators such as
consumer credit and mortgage approvals highlighted further growth in the
sector while faster money supply growth indicated inflationary pressures. Collectively, this suggests that the Bank of England will
soon be delivering another interest rate hike, which
is actually quite possible given last week’s hawkish comments from BoE
officials. The central bank will be
meeting next week and the odds are already in favor of bringing rates up from
4.75 percent to 5 percent. Even
though there are a number of economic releases scheduled between now and then,
none are expected to shift the outlook.
Japanese
Yen – The Japanese Yen is firmer today against the
US dollar and Euro thanks to
a smaller than expected drop in industrial
production in the month September. Although a drop in IP is certainly
nothing to write home about, the underlying rebound in exports is
encouraging. We continue to believe
that the weak Yen will have broad sweeping benefits for the country and the
economic data is beginning to show that.
In fact, traders are closely anticipating this evening’s monthly report from the
Bank of Japan. Even though interest
rates are not expected to be changed, the central bank could express more
optimism about economic activity and inflation which would be very positive for
the currency. In addition to that,
unemployment, personal income, PMI, PCE, housing and construction starts are
also due for release. The market is
also looking for improvements in
all of the reports.
Commodity Currencies (CAD, AUD, NZD)
– Oil prices are back below $60 a
barrel and that has hit the Canadian dollar
along with a larger than expected drop in raw material and industrial product
prices. For a country that is
heavily dependent on oil exports, the drop in price of their most valuable
commodity will eventually hit the economy as well. It is only a matter of time. New Zealand data also helped the
currency rebound with building permits hitting an 18 month high and business confidence improving. Even though Australia did not have any economic
data released, the combination of a rise in gold prices and the prospect of
another rate hike by the central bank have the market bidding up the
currency. This morning’s Sydney Morning Herald had an article suggesting that the
Australian government would be very unhappy if the Reserve Bank of Australia did not raise interest
rates. The recent improvements in
Australian economic data support the latest strength in the currency.
