Here’s what falling oil prices mean to the Dollar
US Dollar
The dollar hit a new 17-month high against the
Euro yesterday. With a light economic calendar this week, there is little to
detract market expectations from continued Fed tightening. Friday is Veteran’s
Day and there are barely any Fed officials scheduled to make comments this week.
Even those that are will not be speaking on the economic outlook, but instead
their speeches will be focused on banking and regional issues. Therefore the
continued trend lower in oil prices and the warmer weather has given the market
some additional cause for optimism.
This past weekend, the media was jumping on the
story that retail gas prices dropped 23-cents nationwide, back to pre-Katrina
levels over the last 2 weeks. For many, this is another validating force that
Katrina’s impact has been and will be limited. According to the IMM report, the
market is very long dollars and sentiment seems to be significantly skewed in
that direction, which means that dollar bulls are most likely going to continue
to look for opportunities to buy on dips.
Even though Friday’s non-farm payrolls report was
rather disappointing, the details of the report including income growth and
average hours worked improved. The only piece of data released yesterday was
consumer credit, which fell $59 million in the month of September. This surprise
comes in comparison to the market’s forecast for a $5.8 billion rise. Consumer
credit in the month of August however was revised higher from $4.9 billion to
$7.9 billion. The big shifts were mostly attributed to borrowing related to
automobile purchases, which fell victim to expired discounts and higher interest
rates. We already saw evidence of weakness in the sector when total vehicle
sales in the month of October where reported at the lowest since August 1998.
This should only be the beginning of broader impacts that higher interest rates
will have across the economy.
Euro
The Euro continued to weaken against the dollar
yesterday following the escalation of riots in the suburbs of Paris as well as a
barrage of mixed economic data. The unrest in Toulouse has now extended to the
eleventh day with reports yesterday that a first victim has been claimed by the
riots. The Prime Minister has vowed to put an end to the riots but minimal
progress has been seen.
In terms of economic data, even though the retail
sales PMI for the Eurozone rebounded from 49.7 to 50.4 in the month of October,
retail sales in Germany, the largest economy within the Eurozone is still in
contractionary territory, thanks to a reading of 48.1. The index for France and
Italy both experienced a slowdown in the expansion from 51.1 to 50.5 for France
and 54.4 to 53.7 for Italy. However not all is bad in Germany. First off, the
PMI report showed a sharp improvement from the previous month even though the
sector is still contracting. Industrial production for the month of September
rebounded from -1.5 percent m/m to +1.2 percent m/m. This is a bit stronger than
forecasted and a good indication that nice improvements will be seen in third
quarter GDP growth.
Meanwhile in ECB speak yesterday, ECB President
Trichet said that he did not want to add much to the comments he made already
last week, choosing instead to only reiterate the central bank’s solidly hawkish
stance and their readiness to “move any time.†Trichet did add though that one
of the major risks to global growth at the moment is high energy prices. ECB
Chief Economist Issing however was much more direct. He said that the central
bank cannot “stand by and permit†inflation expectations to rise. Either way, if
the Eurozone economy continues at its current pace, a rate hike early next year
seems inevitable.
British Pound
Weaker economic data has pushed the British pound
back towards its 3-month lows against the dollar. Over these past few days we
have been seeing clearer evidence of the extended price action that the pound
experiences over the Euro. With the interest rate differential between the
British pound and the dollar at only 50bp, the attractiveness of the British
pound as a carry trade currency pair is practically nil at this point. Therefore
pound bulls have an even less compelling reason to defend the pair.
As for economic data, both industrial production
and manufacturing production did little to support the pound. Industrial
production rose 0.5 percent m/m in September versus expectations for 0.7 percent
growth. Manufacturing production fell -0.3 percent compared to expectations for
a 0.3 percent rise. Therefore we expect no surprises from the Bank of England
this week. Interest rates should be left unchanged once again at 4.50 percent.
Japanese Yen
After six days of back to back gains in the
dollar against the Japanese Yen, the Yen has finally managed to eek out a
positive day. Interestingly enough, over the past few weeks, we have seen the
Japanese Yen slide on positive data and yesterday, rise on negative data.
September’s leading economic indicators fell to 50 percent after hitting a high
of 100 percent in August. The coincident index also retraced from 80 percent,
which pointed to strong expansionary conditions to 55.6 percent, which is
equivalent to weak but positive growth.
BoJ Governor Fukui also made more dovish comments
this weekend at the central bankers’ meeting in Basel. He said that there will
not be any abrupt changes to monetary policy so the only catalyst for
yesterday’s rally lies in oil prices. As a country that imports nearly all of
its oil needs, Japan stands to benefit greatly from the recent retracement in
crude prices. If oil prices continue to retrace, the yen could continue to
rebound. However if oil prices find support, so could USDJPY.
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.