Expect action in the Dollar for the next 2 days
US Dollar
Profit taking in the dollar led to mild weakness
yesterday. The lack of any meaningful US economic data has given some traders a
good reason to reduce positions ahead of two days that will be jam packed with
key data releases. today we are first expecting the US jobless claims report
which should shed some light on how well the US labor market has been performing
post Katrina and give the market some talking points going into Friday’s
non-farm payrolls report. Then at 10am, we will receive ISM non-manufacturing
and factory orders. Given the recent trend of general activity reports, there is
a very strong likelihood that these releases will be dollar positive.
However the real show stealer will be Greenspan’s
speech which begins at noon (EST). Although nothing new is expected to come out
of his mouth, we do expect his reiteration that monetary policy is still
accommodative and that inflation remains a major concern to be positive for the
dollar. Therefore yesterday’s retracement could be nothing more than that.
The risks for not only Thursday’s data but also
for Friday’s non-farm payrolls report is mostly to the upside for the dollar. At
this point each attempt by dollar bears to push the currency lower has been met
with fierce resistance. Softer oil prices are also providing a double stimulus
for the dollar even though consumers will soon have to come to terms with higher
energy bills. They have been cushioned by the unseasonably warmer weather, at
least here in the Northeast, but once the chill spreads nationwide, that cushion
could deflate.
Euro
Leaked late yesterday, Germany’s unemployment
figures continue to be rather downtrodden as the headline figure remained above
11 percent for the 10th straight month. However, much to the chagrin of Euro
bears, the underlying spot rose on the session as speculation surrounded near
term rate hike talk. Now with inflation rearing its ugly head in the form of
higher energy prices, central bankers have fed the market considerations of
finally lifting its benchmark rate from the six decade low of 2 percent.
Subsequently, this highlights the necessity of
such an increase given the continually gloomy economic picture of the region.
Granted, economic data has been on the positive side as illustrated by higher
factory orders and manufacturing data. However, most of the increases could be
attributed to a depreciated single currency and a boost in global foreign
consumption. Additionally, the increase in prices may be simply regarded as a
temporary anomaly as crude prices have spiked in recent months to add to
producer prices, ultimately feeding into the consumer level. Still, the
infrastructure remains weak with consumer demand and confidence relatively low,
both considerably important to a healthy economy. Ultimately, the test may be in
the form of holiday spending, if consumers are willing.
British Pound
Gloomy news for the United Kingdom as further
suggestions of economic slowdown was released in the overnight session. First,
according to the CBI October Distributive Trades Survey, retailers were
continually plagued by consumer disinterest and slumping sales. Putting figures
behind the pessimism, only 24 percent of retailers experienced positive sales.
In fact, the data indicates that some retailers see their number of customers at
the lowest level in seven years. Secondly, construction activity fell in the
same month according to the Chartered Institute of Purchasing and Supply. The
weakest pace of growth since May, declines were seen in the housing sector,
which fell for the first month in five.
However, the figures may not be as gloomy as some
bears would like, ultimately prompting central bankers in considering a rate
cut. Given the fact that the distributive trades survey remains pessimistic, it
has rebounded from sales figures that were the weakest in its 22-year history
last month. Additionally bolstering the notion for a pickup is the upcoming
holiday season as consumers may be saving up to spend come December. In regards
to the weak CIPS construction data, the fact of the matter remains that growth
still remains founded as the figure continues for the 47th month above the 50
expansionary reference.
Japanese Yen
The yen weakened further in the session on
comments by two policy makers that the central bank may not be as forthcoming
with interest rate hikes as the market previously expected. Earlier in the
session, Finance Minister Sadakazu Tanigaki and Chief Cabinet Secretary Shinzo
Abe expressed their continued favoritism towards a zero interest rate policy.
Based on the fact that deflationary conditions have not been completely rung
through, Abe stated that the Bank of Japan should continue in retaining a
“monetary easing policyâ€. As a result, the comments sparked concerns that
domestic investors will continue to invest in subsequent G7 economies, passing
aside their own 1.5 percent yielding yen bonds for higher rates of return. This
idea is exactly the reason why it seems the Japanese yen is mimicking the price
action seen late in 2004 involving the Euro.
Traders will remember in particular that,
although technically overextended, the currency held up lofty valuations till
the onset of the New Year. The exception in this case, is that fundamentals are
justifying a lower rate rather than a higher one. As a result, more emphasis
will be placed on indications of rising prices as it seems the only factor in
preventing a corrective valuation as foreign investment continues to pour into
the region.
Kathy Lien
Kathy Lien is the Chief Currency Strategist at
Forex Capital Markets. Kathy is responsible for providing research and analysis
for DailyFX, including technical and fundamental research reports, market
commentaries and trading strategies. A seasoned FX analyst and trader, prior to
joining FXCM, Kathy was an Associate at JPMorgan Chase where she worked in Cross
Markets and Foreign Exchange Trading.
Kathy has vast experience within the interbank market using both technical and fundamental analysis to trade FX spot
and options. She also has experience trading a number of products outside of FX,
including interest rate derivatives, bonds, equities, and futures. She has a
Bachelors degree in Finance from New York University. Kathy has written for
Stocks and Commodities, CBS Market Watch, ActiveTrader, Futures and SFO
Magazine. She is frequently quoted on Bloomberg and Reuters and has taught
seminars across the country. She has also hosted trader chats on EliteTrader,
eSignal, and FXStreet, sharing her expertise in both technical and fundamental
analysis.