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Greenback Goldilocks?
Monday, 20 November 2006 04:43:31 GMT  |  Boris Schlossberg - Senior Currency Strategist and Terri Belkas, John Kicklighter, David Rodriguez - Currency Analysts
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$    Greenback Goldilocks?
€    Euro Data Offers Little Joy
¥    Yen – Last Days of the Carry?
₤    Pound Down on Softer Prices
₣    Swissie Saved By Carry Rumors
C$   Loonie Drops on Oil Lows
AU$   Dovish RBA Not Enough to Hold Aussie Down
NZ$   Kiwi Data Slows, But Sentiment Set

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Greenback Goldilocks?

The fundamental data for the week was nothing to write home about but the greenback managed to squeeze out a gain nevertheless under the goldilocks premise that current interest conditions will not dampen growth going forward. As we wrote on Friday “The primary driver of dollar strength was attributed to the bounce in the NAHB index which rose to 33 from Octobers low of 31.  The bull case rests on the assumption that housing has bottomed and consumers fueled by higher wages and lower mortgage rates will flock back to the market. Needless to say we remain highly dubious of such sunny scenarios given the vast oversupply of inventory on the market. “ To prove our point right the numbers forHousing Starts actually printed much worse at 1486K versus 1680K expected. October’s number was the lowest level this decade and showed the stark contraction in housing demand.


The horrid housing data, finally drove a stake through the dollar rally and the greenback gave back most of its gains as Friday afternoon wore on. Still the market consensus coalesced around the fact that the Fed will not lower rates even in the face of overwhelming evidence of an economic slowdown. The evidence included such factors as declining  Industrial Production, Retail Sales and sharp drops in both inflation gauges. Even the seemingly stronger data such as Philly Fed  was highly deceptive with most of the subcomponents showing further deterioration. 

Next week holiday shortened as it is should see very little order flow with only the LEI and the consumer sentiment data on the docket. The EUR/USD continues to be well contained within the 1.2700-1.2900 range but the fundamental bias remains to the dollars downside– BS




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Euro Data Offers Little Joy

While the dollar data was certainly dour this week, euro data was not much better. EZ GDP expanded at only 0.5% vs. 0.6% eyed while ZEW once again printed worse than expected at -28.5 vs. 24.5 consensus. Additionally Industrial Production contracted markedly dropping -1.0% versus -0.3% forecast.  The only bright light in this litany of downbeat data was the better than expected EZ Trade Balance deficit  which improved to +2 Billion euros from -1.5 Billion expected. The number was helped by lower energy costs which cut the import bill significantly.

Next week Euro-zone calendar is much busier than US’s.  Among the key data points that traders will examine will be German Retail Sales which have been disappointing as of late as well as New Industrial Orders which should provide a better clues as to the strength of the  EZ production. Finally end of the week brings the all important IFO survey. The market expects no change which should a be positive for the euro  as the index remains near decade long highs. Therefore  next week might be one of the few times when trade on EUR/USD is driven more by EZ eco data rather than US news. Although given the holiday nature of the week, order flows should be limited and trading generally quiet  as the week progresses. – BS






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Yen - Last Days of the Carry?

Overall, not a bad week for the yen on relative basis. The unit had the smallest decline against the greenback amongst all the  majors dropping only 10 basis points. The yen continues to be hurt by the inaction of Japanese monetary officials who refuse to commit to further rate hikes in the near future. The latest salvo came from Governor Fukui who stated after Thursday’s BOJ policy meeting that, “I would not rule out any timing,”  in response to the question of future rate hikes. The FX market took the comment to mean that the BOJ will hold off on rate increases until Q1 of 2007 when it has had a chance to gauge the strength of US consumption during the all important Christmas season.  The US is Japan’s number two market and remains critical to its export led plans for growth.

Yet the hesitancy of Japanese policy officials may not matter much anymore. Friday’s rumors that a large hedge fund had to unwind its large carry trades after its long oil/short yen position began to blow up may be the trigger that unleashes an avalanche of carry trade liquidation before the year end. Many specs have funded their long commodity trades with short yen positions and if those trades begin to sour carry trade liquidation may commence regardless of any inaction on the part of BoJ.

Next week the Japanese markets much like the US will be closed for Thanksgiving so the data flow will be very light. The All Industry index may spark some interest, but perhaps the most meaningful event will not come from the calendar but rather from the completion of the G-20 meeting in Melbourne. If the FinMins make any aggressive comments about yen weakness USD/JPY  may be in for more selling  as the week progresses. – BS






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Pound DOwn on Softer Prices

After selling off after a round of disappointing inflation data followed by more dovish BOE inflation report and an unexpected jump in the ILO unemployment rate, Cable surged towards 1.8900 on Friday as the surprise jump in retail sales of 0.9% on Thursday resonated with traders. The data reminded the markets them that the UK is still performing well despite easing price pressures. This was right in line with the central bank’s inflation report, which called for weaker inflation, but stronger growth led by consumer spending.  Nevertheless, the BOE will not want to take monetary policy tightening too far and may be forced to wait for a resurgence of price increases before even considering taking rates above 5.00%.

Now that inflation data is out of the way, GBP/USD could find strength as economic reports should signal that growth in the UK is alive and well. House prices are likely to remain buoyant while mortgage approvals are estimated to hold at robust levels. However, the marquee event of the week will be the release of the minutes of the BOE’s November 8-9 meeting. Traders will be looking towards the comments and outlooks of the central bankers, which could be more dovish given last week’s inflation report. – TB






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Swissie Saved By Carry Rumors


Despite hawkish commentary from Swiss National Bank President Jean-Pierre Roth, Swissie spent most of the week racking up losses on an empty calendar. Mr. Roth said that the markets would not be incorrect to assume further rate hikes in 2007. While Swissie strengthened slightly on the comments, it was not until Friday’s rumors that a large hedge fund had to unwind its large carry trades that USD/CHF was sent plummeting from heavy resistance at 1.2540. Meanwhile, EUR/CHF also dove on the rumors, especially as the pair probed the perceived SNB “tolerance threshold” of 1.6000. While economic data out of Switzerland has started to indicate that stellar growth may have peaked, Swissie may be the beneficiary of continued carry trade liquidation before the year end.

Amidst the SNB’s tireless talk of normalizing rates not only in December, but in 2007 as well, producer and import prices, may leave traders thinking the central bank is being excessively hawkish as the figure is expected to slip 0.2%. Markets will also be looking to see if exports can hold up and keep the trade balance near last month’s record of 1.83 billion francs and the release of the Swiss employment level will provide a gauge of how tight the labor market truly is. Nevertheless, Swissie longs may be looking at wider price movements in tandem with yen, as both currencies could be subject to carry trade liquidations. – TB







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Loonie Drops on Oil Lows

Perpetually weak oil prices at 17-month lows sent Loonie plummeting over the course of the week as dismal economic data only exacerbated the currency’s weakness. International securities transactions posted much weaker than expected as foreign investors reduced their holdings of Canadian securities by C$3.077 billion. The outflow was mostly in equities, in line with the tumble in the S&P/TSX Composite on the month. Meanwhile, manufacturing shipment dropped 3.3% while new orders were also very weak at -2.8% and unfilled orders slipped to -0.9%. The disappointing results highlights the pressures on the manufacturing sector, as the relatively strong Canadian dollar and steadily declining US demand has taken its toll.

Mixed economic data out of Canada this week could leave Loonie support questionable, as everything from CPI to sales are estimated to slip upon release. While a decline in CPI for October will not be surprising given weaker energy prices, the Bank of Canada’s measure is anticipated to pick up to 2.3%, which is above the bank’s projected 2.0% and leaves the MPC much more likely to stay on hold well into 2007. However, tepid wholesale and retail sales may leave growth in Canada vulnerable, and combined with prolonged sub-$60 oil, Loonie may subsequently be found testing 1.1500. – TB






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Dovish RBA Not Enough to Hold Aussie Down


A torrent of bearish economic news was not enough to hold the Australia dollar down, as Aussie moved 0.7% higher through Friday’s close. Starting off the week, the Reserve Bank of Australia’s Quarterly Monetary Policy Report was enough to spark a sharp sell-off in the domestic currency. Central bankers took a decidedly dovish tone when they said that inflation was likely to decline sharply over the course of the year. Though they also said that it would likely resume its previous pace through early 2008, the underlying message seemed to indicate little sense of urgency to moderate price pressures through policy. Forecasting price pressures at just over three percent for the coming months, the bank said that its recent actions improved overall outlook on the headline rate. Traders subsequently pared expectations of higher rates through 2006, selling Australian dollars and buying interest rate futures.

Later economic data was no help for the domestic currency, as the closely-watched Consumer Confidence reading dropped to four-month lows following the RBA’s most recent interest rate hike. Higher borrowing costs and a progressively worse national drought has put a damper on optimism, with the Westpac survey showing that Australians believe the economy will worsen in the coming year. None of the issue mattered however as the Aussie held bid, propped by the rejuvenated rally in gold and its own fat yields which continued to attract carry trade flows.

The week ahead is likely to provide much fewer fireworks for the currency, with only two second-tier reports to look forward to. Instead of significant economic data, the markets will likely look forward to press briefings from the weekend’s G20 meeting in Sydney . Traders will pay special attention to any mention of carry trade dynamics, as officials have grown increasingly leery of specific currency strength or weakness due to the immensely popular trade. As a result, it will be important to listen for any commentary pertaining to overvaluation of high-yielding currencies, especially as they compare to the Japanese Yen and Swiss Franc. The rest of the week should provide relatively less volatility for the Australian dollar, with both the Westpac Leading Indicator and DEWR Skilled Vacancies rarely market-moving events. Suffice to say, however, any substantively poor result could drive the Aussie further off its recent 6-month highs. - DR





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Kiwi Data Slows, But Sentiment Set


The last of the third quarter reports trickled through the kiwi calendar last week to great fanfare among the bullish ranks.  Helping to correct the consistent decline in the nation’s data, ANZ job vacancies printed at a record high and started the currency off on the right foot.  After government figures showed over the previous week that the jobless rate grew more than expected over the same period, the level added supported to the belief that New Zealand’s consumer base is still running strong.  This positive sentiment was further supported by the retail indicators issued a few days later.  Through the month of September, retail sales contradicted predictions of a modest decline by jumping 1.2 percent.  More importantly was the greater than expected 1.0 percent jump in sales over the three months through September.  This ground-level indicator provides the most reliable evidence that consumer spending habits could weather interest rates, record energy prices and moderating employment to drive inflation gauges to their limits.


The one sour note breaking up the otherwise solid basket of bullish fundamentals last week was the factory price reports.  Already shaken by the weak consumer price index and dovish comments from RBNZ Governor Alan Bollard in previous sessions, the 0.7 percent pace of inflation at the factory gate seems to be worst of the lot.  Though businesses were still paying for expensive energy products and other commodities, they were trying to slash their own prices and drum up more business.  This dichotomy between relentless consumer spending and easing inflation will likely dominate the market’s consciousness next week as the data tides recede.  The one indicator of note in the days ahead will be October’s trade report.  Released on Friday morning in New Zealand , the market will interpret how energy prices over the period will effect imports, especially with the kiwi steadily appreciating against the currencies of its biggest trade partners. – JK

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