special reports

US Dollar, Japanese Yen Outlook May Hinge on US, European Event Risk

Monday, 24 November 2008 02:52:21 GMT  |  Terri Belkas, Currency Strategist

The US dollar and Japanese yen failed to break above key resistance points on Friday as risk appetite made a last minute recovery. Event risk will pick up this week for the US dollar, euro, and Canadian dollar, but with the US markets on holiday on Thursday, lower volumes may either result in wild volatility or very subdued trading.

• German IFO Survey – November 24
The IFO index of German business confidence is forecasted to show broad declines in sentiment on the business climate (from 90.2 to a 5-year low of 88.7), current economic conditions (from 99.9 to a 3-year low of 96.8), and the outlook for growth (from 81.4 to a record-low of 81.0). However, the November 11 release of the German ZEW survey shows that investor confidence on the economic outlook improved very slightly, while sentiment on current conditions fell further. Overall, businesses, investors, and consumers are likely to hold a cautious view of growth going forward, especially as the Euro-zone tips into recession and financial market instability shows no signs of easing. The release of this indicator at 4:00 ET tends to be a short term market-mover for the euro, though traders shouldn’t look for follow-through during the rest of the day.

• Canadian Retail Sales – November 25
Consumer spending in Canada is expected to have gained 0.3 percent in September, and excluding autos, retail sales are forecasted to have risen 0.2 percent. However, there is potential for a surprisingly strong reading given the solid employment numbers we’ve seen lately. In fact, the Canadian economy has added on workers for the past three months, and a record 106.9K in September alone. Furthermore, the September reading of Canadian wholesale sales surprisingly jumped 1.5 percent, and can sometimes serve as a good leading indicator for the headline retail sales report. As a result, this 8:30 ET release has the potential to lead the Canadian dollar higher, though a disappointing figure could weigh the Loonie down.

• US 3Q GDP Revisions, Consumer Confidence – November 25
In case the first round of US GDP readings for the third quarter weren’t bad enough for you, the figures are anticipated to be revised even lower at 8:30 ET. Indeed, annualized GDP is forecasted to be revised down to -0.5 percent from -0.3 percent, while personal consumption is expected to be corrected to -3.2 percent from -3.1 percent. However, it will likely take a surprisingly low result to illicit any sort of reaction from the markets, as traders are already well aware that economic conditions in the US remain dismal. Later in the morning at 10:00 ET, the Conference Board’s consumer confidence index is forecasted to hold near the record low of 38.0 reached just last month, though given the gloomy outlook for the economy, there may be downside risks. The key here will be to gauge the impact of the news on risk trends, as disappointing data could trigger flight-to-quality and thus, US dollar buying. On the flip side, readings in line with expectations shouldn’t have a huge impact.

• US Durable Goods Orders – November 26
Can Boeing help US durable goods orders to rebound? Not a chance, as airline orders slumped in October to 14, down from 41 in September. Indeed, Durable Goods Orders are forecasted to have dropped 2.7 percent and even excluding transportation is anticipated to fall negative for the second consecutive month. While the headline will have the most impact on forex trading, the markets should keep an eye on non-defense capital goods orders excluding aircraft, as this number serves as a leading indicator for business investment. The reading has contracted over the past two months, and combined with the weak outlook for the headline reading, risk aversion could linger and ultimately lead the US dollar higher.

• Euro-zone CPI Estimate – November 28
Eurostat estimates for Euro-zone CPI are projected to show at 5:00 ET that inflation growth eased to a 2.4 percent pace in November from 3.2 percent. Given European Central Bank President Jean-Claude Trichet’s more bearish stance on economic growth and the bank’s participation in the October 8 coordinated rate cuts and their November 6 reduction during a scheduled meeting, a weaker-than-expected CPI reading could exacerbate the market’s speculation that the central bank will cut rates again soon. We also have to consider that the Euro-zone unemployment rate will also be released at the same time and is forecasted to edge up to 7.6 percent. Considering the dismal conditions plaguing the region’s economies, there is a risk that the unemployment rate will climb even higher, and combined with a drop in CPI, the euro could plunge.

See the DailyFX Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators.

Send questions or comments to tbelkas@dailyfx.com

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