US Dollar - No More Rate Hike this Year According to Fed
Euro - Eurozone Data Confirms More
Optimistic Outlook from ECB
Swiss Franc - Swiss PMI Hits 10 Year
Despite an extremely busy data week, theUS
dollar did not budge one iota from its 1.2750 to 1.2925 trading range against
the Euro. In fact, even the
combination of non-farm payrolls and ISM on the same day failed to result in any
meaningful price action for the US dollar.
The number of jobs created in the month of August was indicative of
decent growth in the labor market, but as we mentioned yesterday, traders are in
the habit of questioning the sustainability of every good number which has led
to only a limited rally in the dollar.
Furthermore, looking beyond the headlines, we
see signs of easing growth and inflation.
Average hourly earnings rose a meager 0.1 percent while average weekly hours contracted from
33.9 to 33.8. The manufacturing
sector also continued to lose jobs which confirm the recent deterioration in the
sector. Later in the morning, the
US dollar lost all of its earlier gains after a sharp drop in construction
spending and pending homes sales.
The drop in construction spending in the month of July was the biggest in
five years. There is no doubt that
the housing market is slowing, which is one the Federal Reserve’s major
concerns. In addition, even though
the ISM manufacturing index only moderated
slightly, the prices paid component experienced the biggest drop since the
beginning of the year confirming other indications of easing inflationary
pressures. On balance, today’s
reports do little to shift the Fed's game plan to continue pausing. Fed fund futures are pricing in a less
than 20 percent chance of another rate hike this year. Nothing in the reports had what it takes
to push us out of the 1.2750-1.2925 trading range that we have been trapped in
since the beginning of the month.
Looking at next week’s calendar, aside from non-manufacturing ISM and the
Beige Book report, there is little US data. However the beginning of a new quarter
and the return of traders from their summer holidays could still lead to some
new positioning that could drive market activity.
The Euro is holding on strong and it
has good reason to. Not only was
ECB President Trichet exceptionally hawkish yesterday, but this morning’s
economic data also indicates that the Eurozone economy is performing very
well. GDP was revised upwards from
0.6 percent to 0.9 percent for the second quarter, with the annualized pace of
growth increasing from 2.0 percent to 2.6 percent. Even though the Eurozone’s manufacturing
sector PMI moderated from 57.4 to 56.5, it still remains in expansionary
territory. This had led the
Kiel economic research institute to join the ECB
in revising up their growth forecasts for Germany. They expect 2006 growth to reach
2.4 percent compared to an earlier forecast of 2.1 percent. In contrast to the ECB however, they
expect growth to moderate in 2006 to 1.0 percent due to an increase in the VAT
tax. In the week ahead, we expect
more Euro bullish sentiment as divergences in monetary policy and economic
growth between the US and Eurozone become clearer. As for economic data, the two most
important economic releases that we are expecting are Eurozone retail sales and
producer prices. With the ECB so
concerned about taming inflation, PPI should have been very strong in the
July. Meanwhile over in Switzerland, data continues to be
exceptionally good. The purchasing
manager’s index hit a 10 year high in the month of
August. This suggests that we could
see a 50bp instead of a 25bp rate hike by the Swiss National Bank at their next
monetary policy meeting.
A softer PMI report has pushed the
British pound lower against the Euro.
A decline in new orders and export orders drove the index down from 53.6 to
53.1. The prices component of the
report also moderated, which should relieve fears about inflation. Against the US dollar, the pound rallied, but primarily due
to the dollar’s reversal. Looking ahead, unlike the US, the UK has a busy economic calendar. We are expecting more reports on the
state of the housing market, in addition to retail sales and industrial
production. The Bank of England
has a monetary policy meeting scheduled, but after last month’s surprise rate
hike, they are expected to keep rates unchanged this month. As the Bank of England
continues to stand firm on leaving interest rates at its current level, the
divergence of its own monetary policy with the ECB’s policy should come to the
benefit of EUR/GBP.
The only piece of economic released
overnight from Japan was vehicle sales. Unsurprisingly, the lack of growth in
wages and the rise in energy prices has resulted in negative demand for
Japanese economy has not been fairing
well lately and we expect this to be validated by more cautionary and possibly
even pessimistic outlook in next week’s monthly report from the Bank of
Japan. The central bank will also
be holding a monetary policy meeting, but given the recent trend of economic
data (both in terms of growth and inflation), there is little reason for them to
consider raising rates again anytime soon.
Looking ahead, politics will soon dominate headlines in Japan. Prime Minister Koizumi is scheduled to
step down from office on September 20th. Shinzo Abe, the current cabinet
secretary is set to take over his post temporarily. Abe announced yesterday that he will
also be running for the job. He is
the most popular candidate as he wants to make spending his top priority.