Durable Goods Sink as Higher Rates Sting, Sends Dollar Lower
THE TAKEAWAY: Durable goods orders plummet after three months of gains > Business investment struggling to improve > US economy signs of struggling in 2H’13 > USDJPY BEARISH
A second consecutive day of weaker than expected US data (with housing on Friday disappointing) has the US Dollar on its heels to start the week. Durable goods orders, a proxy for larger scale consumption (appliances, automobiles, etc.) fell by nearly twice as anticipated, a sign that the uptick in interest rates is hurting an economy struggling to gain traction in positive growth territory.
The quick snapback in US yields and the US Dollar suggests that investors are no longer simply betting on a QE3 taper or not. Rather, in light of commentary out of the July FOMC Minutes and the Jackson Hole Economic Policy Symposium last week, taper speculation has become data-centric.
That is, weak data today makes a QE3 taper likely at a smaller interval (a reduction of $10B) than say what the market appears to have priced in presently ($20-25B per my estimate). Regardless, here’s the data driving the US Dollar lower:
- Durable Goods Orders (JUL): -7.3% versus -4.0% expected, from +3.9% (revised lower from +4.2%) (m/m)
- Durables ex Transportation (JUL): -0.6% versus +0.5% expected, from +0.1% (revised higher from 0.0%) (m/m)
GOLD (XAUUSD) 1-minute Chart: August 23, 2013
Charts Created using Marketscope – prepared by Christopher Vecchio
Following the release, the USDJPY dropped from ¥98.51 to as low as 98.26. At the time this report was written, the pair had pulled back to 98.41.
Further losses are in question as the market faces a “chicken versus the egg” situation: is the US economy weak; or is taper speculation driving up US yields, which in turn is provoking an adjustment period for consumers who adjust spending habits due to elevated financing costs? If viewed from the latter perspective, the US Dollar could post a greater recovery as the day goes on.
--- Written by Christopher Vecchio, Currency Analyst
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