usd_101609

US Dollar May Be Setting Stage for Advance

Fundamental Outlook for US Dollar: Bullish

US advance retail sales fell 1.5% in September, led by contraction in auto sales
Fed meeting minutes indicated that Bernanke & Co. were open to expanding MBS purchases in September 
- US inflation reports continue to give mixed signals, with headline CPI at -1.3% and core CPI at 1.5%

The US dollar was one of the weakest major currencies last week, with the Japanese yen beating the greenback to being the biggest loser, as market sentiment reflected increased risk appetite. This was probably best exemplified by the media’s euphoric response to the DJIA’s test of 10,000 on Wednesday and close above on Thursday, but with extreme optimism comes the risk of reversal.
 
Looking to the week ahead, US dollar event risk will start to pick up again on Tuesday as US housing starts and building permits are projected to have risen for the second straight month in September to 10-month highs, with starts anticipated to hit 610,000 from 598,000 while permits may rise to 590,000 from 580,000. While the unemployment rate is still in the process of rising, the federal government’s tax credit for first-time home buyers of up to $8,000 is likely to remain supportive of demand through the end of the year. However, if the program expires as planned on December 1, the growth we’ve started to see in the housing sector could start to wane.

The release of the Fed’s Beige Book report may not have a huge impact on trade on Wednesday, but it will serve as a good compilation of statistics on how the central banks 12 districts are faring economically. On Thursday, the leading indicators index is projected to rise for the sixth straight month, this time by 0.8 percent. However, gains are likely to be mostly the result of stock prices and the interest rate spread, while gauges of employment and business investment should remain weak.

Finally, on Friday, the National Association of Realtors’ index of existing home sales is expected to rise 5.9 percent for the month of September to an annual rate of 5.4 million, the highest in just over two years. Other factors to keep in mind are supply levels and median prices, both of which have fallen steadily to 8.5 months and $177,700, respectively. As with housing starts and building permits, the federal government’s tax credit for first-time home buyers of up to $8,000 is likely to remain supportive of demand through the end of the year, though surprise declines, as we saw in August, are not out of the question.

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