US Retail Sales Will Determine if
the Bottom in EURUSD is Real
ECB Officials Continue to Talk of
More Rate Hikes
Traders Look Ahead to BoJ Monthly Report and
days of consecutive weakness has once again proven to be the most that the
EUR/USD could handle. The dollar
started the day on a softer footing even before US data
hit the tape. To the surprise of
the market, the trade deficit widened to record levels once again in the
oil prices remaining stubbornly high and above $70 for most of the month, the
import bill continued to rise. At
the same time, imports from China continued to grow despite the
recent appreciation in the Yuan.
This makes the gap between US trade related outflows and foreign
investment related inflows even more difficult to close. If you recall, the Treasury's net
foreign purchases report was extremely weak for the month of July. Foreign demand for US assets is expected
to rebound in August thanks to the rally in stocks, but if it does not jump
significantly, we would have two months of funding deficiencies, which would be
a problem for the dollar. The TIC
report is due next week. The
sell-off in the dollar was relatively modest because most traders expect the
imbalance to improve in the months ahead, reflecting the sharp fall in oil
prices that we have seen in September. Aside from the weak trade balance this
morning, the Fed’s Beige Book report also disappointed traders by not containing
the same hawkish tone as the FOMC minutes released yesterday. According to the various Fed districts,
economic activity was mixed across the nation. Sales of interest rate sensitive goods
such as cars and homes have been sluggish but consumer spending overall is
picking up. Even though the job
market is still relatively healthy, inflation is not much of a concern as wage
and price pressures remain relatively well contained. Four of the Fed districts saw firmer
growth, but a couple of the districts also reported cooler growth. At this point, the US
dollar is reaching critical resistance levels. A true top in the mighty buck
will be dependent upon tomorrow’s consumer spending data. Judging from recent reports, retail
sales have a greater risk of coming out stronger than weaker. Earlier in the week, both same stores
sales and the Redbook retail sales reports were particularly strong. Over the past two days, we have not only
seen the positive comments on consumer spending in the Beige Book report, but
also in yesterday’s comments from President Lacker.
In contrast to the US,
where everyone is trying to forecast if and when the Federal Reserve will begin
to cut interest rates, in the Eurozone, the direction of interest rates and the
message of the central bank is very clear. As if we did not hear them the
first time, one after another, ECB
officials have been telling the markets that interest rates remain very low and
monetary policy remains accommodative.
Quaden was the latest council member to do so. He added that another rate hike before
the end of year is “very likely.” The central bank’s monthly report reiterated
a similar message. This means that
even if inflation is falling globally and Germany, the Eurozone’s largest
member country faces some risks to growth in the year ahead, the ECB will still
be raising interest rates again this year.
This should keep the Euro relatively bid against other currencies where
the interest rate premium gap is closing in on 1 percent or less, such as
EUR/CAD and EUR/GBP.
After yesterday’s hawkish comments
from Bank of England Governor King, the British
pound started to bottom out against the US dollar.
We saw further strength today on the back of mildly
hawkish comments from Sentence and Besley, the new MPC members. Like King, they were concerned about
whether any drop in inflation would last.
This suggests that they leaning closer to raising rates again, especially
if economic data begins to turn up.
The housing market is continuing to stabilize as the RICS house price
balance increases from 35 percent to 45 percent. Tomorrow’s FT house price data should
reflect a similar condition. The
only question is whether we see a pickup in wages and consumer spending as a
result of that.
The Japanese Yen is beginning to turn against the
US dollar, but the sustainability of
this turn will be dependent upon whether we hear hawkish comments from Bank of
Japan Governor Fukui tonight along with a more positive outlook in the central
bank’s monthly report. This has
strong possibility of happening, especially since Japanese
companies have benefited greatly from the weakness of the Yen. The value of the Yen not only helps to
boost exports, but it also makes it easier for the central bank to raise
interest rates. Therefore the BoJ
could acknowledge the yen’s benefits as well as resurrect the talk of the
possibility of an interest rate hike next year. However politics continue to be a major
risk for the Yen.
Japan has instituted
new financial sanctions that would freeze transfer of funds to groups that may
have links to North
Korea and is
barring all North Korean
ships from entering Japanese ports.
Trade between Japan
Korea is relatively small, but tensions between
the two nations are not.