Collapse of the Greenback
What began as technically based,
liquidity starved rally last week has turned into a full fledged dollar rout
this week as US economic data has started to flash warning signs of recession.
Both Chicago PMI and ISM printed below the key boom/bust level of 50 – for ISM
this was the first time since spring of 2003. Furthermore, 5 out of the 10 subcomponents of ISM
fell below 50 including employment – which tends to be a leading indicator for
next Friday’s NFP. In short, a blizzard of bad data has destroyed most dollar
longs and if the bad news persists
the greenback may be caught in a perfect storm as liquidation will become disorderly
and traders will dump dollars regardless of price.
Next week ISM Non-Manufacturing may buy the dollar a small reprieve if it surprises to the upside especially given the fact that services are a much larger part of the
Euro Shows No Weakness
The story for euro bulls this week
could not be more positive. Not only did most of the eco data prove supportive
to the unit but the persistently hawkish ECB members allayed any fears that the
central bank may hold off on any rate hikes due to the rising currency. The big
reduction in German unemployment which decreased to -86K form -30K expected was
the most impressive statistic of the week suggesting that the 12 member region
was generating organic growth despite the clear headwind for the export sector.
With both Consumer and Business confidence improving and ECB reportedly
comfortable with 1.3500 EUR/USD, the unit may yet have more room to go to the
upside.
Next
week promises to be as active on the Euro-zone side as on the
Yen – Still in a Quagmire
On
Friday we wrote, “Another night of heartbreak for yen longs
hoping that the eco data will
would provide them with support
for a December rate
hike from the BoJ, as almost all the numbers from employment to CPI to
spending printed below forecast. While the jobless rate continued to remain near
8 year lows suggesting tight labor markets, the job to applicant ratio
slipped at bit from 1.09 to 1.06 indicating that demand may have peaked. The
troubling aspect of the Japanese data is that jobs are not translating into
stronger consumer spending. With overall household spending still –2.4% less
than a year ago and with CPI increasing a very modest 0.1% rate the BoJ finds
little reason to raise rates just yet.” By the end of the week the yen did
appreciate against the dollar
rising 53 basis points but it
lagged the other majors and traded at yearly lows against both the euro
and the pound.
Next
week Capital Spending may start the week off positively for the yen but the
overall calendar is relatively barren with only the Eco Watchers survey at the
end of the week. The Eco Watchers is our favorable gauge of consumer strength in
Uncontainable Cable
Pound continued to propel higher
this week as the anti-dollar stance was alive and well in the markets and the
GBP/USD pair racked up nearly 500 points in gains while EUR/GBP dropped to
three-week lows. The economic data of the week, however, was decidedly mixed as
The
week going forward is full of estimated disappointments, with consumers
anticipated to indicate a more negative bias once again and the industrial
sector likely to slow further as export growth moves at a snail’s pace. Although
the BOE is widely anticipated to hold rates at 5.00% after last month’s 25 basis
point hike, traders will be anxiously awaiting commentary from central bankers
to gauge policy action for 2007
Swissie Solid on Hike Expectations
Swissie
made a successful push below the 1.2000 level this week, despite the copious
amount of economic data pointing to a marked slowdown in Swiss expansion. The
most important gauge for the country’s growth, the KOF leading indicator, posted
weaker than expected in November at 1.73, marking the fifth decline in a row and
pointing to further deceleration in the first half of 2007.
With
sparse data on the Swiss calendar, USD/CHF price action will likely be more
dependent on news from the
Loonie Misses the Anti-Dollar Boat
The
Canadian dollar was the sole loser against the greenback this week as data
indicated that the economy contracted for the first time in 18 months. From the
monthly breakdown, the underperforming sectors were obvious, as manufacturing
plunged 1.4% while industrial production eased 1.4%. This combo offers yet another sign of
the weakness in the sector that is suffering under a Canadian currency that has
risen 40% in 4 years. Another
disturbing change came from the retail and wholesales groups, which track
domestic demand, as wholesale sales plunged 2.1% while the pace of growth in the
retail sector was cut to a paltry 0.2% from 0.8%. Loonie was also vulnerable on
the release of labor market results. Though the unemployment rate had been
anticipated to tick higher to 6.3% from 6.2% and level of employed people
increased a better-than-expected 22,400, a breakdown of the results showed that
all of November’s net job gains were the result of part-time additions, while
full-time positions dropped 18,100. This indicates that much of the improvement
was a result of seasonal hiring and could point to a potential weakening of the
labor market after the holidays.
The
Bank of Canada’s monetary policy meeting is likely to set the stage for Loonie
price action this week, as traders will be looking for commentary from central
bankers regarding the “balance” of risks for the economy. Some traders may up
the ante on bets that the BOC’s next move will be a cut. Additionally, with such
weak results in manufacturing already reported for Q3, Ivey PMI for November
could be critical to either the bull or the bear point of
view
Aussie Rallies on Gold Prices
The
Australian dollar rallied to fresh 18-month highs, as broader declines in its
Starting
off the week of market-moving data, Government officials will report the results
of the closely followed Current Account Survey at 00:30 GMT Tuesday. Analysts
predict that the figure improved through the third quarter of the year, but
risks to median estimates may remain to the downside with demand for high
Australian yields placing a strain on the balance. The subject of Australian
yields will likewise come into play just two hours after the Current Account
news, with the RBA set to announce rates following its December meeting. The
central bank is widely expected to leave rates unchanged and subsequently
release no new commentary following the report. Speculation over the future
rates will draw attention to the Q3 GDP on Wednesday to be followed by
unemployment on Thursday. Outlook is mixed for the two reports, with stronger
GDP likely to be followed by rising unemployment albeit off recent 30-year lows.
Needless to say, any surprises in the data could cause large price swings in AUD
pairs, with AUD bulls focused on a retest of 9-year highs at the psychologically
significant 0.8000 mark
Taking Advantage Of The Kiwi Carry
The Kiwi was floating higher
against most of the liquid pairings last week, but no where was the bullishness
more obvious than in the NZDUSD.
Aided by some of the worst
While
both of these indicators are intriguing for the most hawkish, a rate hike is
still seen as a long shot in the futures markets. For last week’s strong few
pieces of data, they will likely be regarded with a skeptical air as the RBNZ
focuses on its core inflation responsibilities rather than preempt through
factory activity numbers. Another
reason to believe Governor Alan Bollard and his board will shun a hike are
ominous remarks he himself released in the past. At the last meeting in October, in which
he decided to leave interest rates untouched, the Governor said, “inflation
pressures appear to be abating gradually.”
More recently, Bollard even weighed in on the currency saying it “appears
high relative to some underlying fundamentals.” If there was any truth to these
comments, and it just wasn’t an unsuccessful way of talking down the currency, a
rate hike (or suggestion of an impending hike) would certainly exacerbate the
“misaligned” market valuation
