Be prepared for a Rita relief rally
Rita wasn’t nearly as
bad as feared and with oil markets staging a retreat, the greenback rally began
in earnest as EUR/USD bids first broke 1.2150 then 1.2100 and came
close to testing the psychologically important 1.20 level. For the week the
dollar gained 157 basis points against the euro buoyed mostly by the its
increasing interest rate differential which expanded to 175 basis points after
the Fed hike on Tuesday.
Rates and growth appear to be the key themes as
we move into the fall trading season. As long as US maintains its 3% economic
growth, Fed hikes are likely to continue which will fuel even more dollar buying
from carry speculators. That premise will be sorely tested however as we move
into next week. Traders will watch Durable Goods numbers projected to rebound 1%
from last month’s 4.9% plunge as well the critical Chicago PMI report on Friday.
Last month Chicago PMI showed the largest drop in the survey’ s history falling
below the critical 50 boom/bust level. If the Chicago PMI numbers climb back
above the expansionary threshold, the just as with Rita US economic data may
have escaped a far gloomier fate.
Euro
“Interest rates in the euro zone are at their
lowest level thanks to confidence in price stability inspired by ECB policy. The
ECB will not hesitate to impose sanctions against countries that fail to respect
the rules laid out in the stability pact.”
Jean-Claude Trichet,
European Central Bank President
Wednesday, September 21, 2005 08:41 GMT
Still Nothing New
Political negotiations continued in Germany as
Merkel desperately tried to construct the coalition government without
Schroeder’s Socialists. She even held talks with the Greens, but the coalition
of environmentalists, free-marketers and conservative CDU just did not seem like
a likely possibility. The choice for Germany appears increasingly clear — “grand
coalition†or new elections. The political uncertainly is sure to pressure the
euro further, but as Barron s quipped this week-end, the German’s are quickly
coming to a realization that they don’t really need a government in order to run
the country.
Meantime the IFO survey will the marquee economic
release of the week and it will be interesting to see just how big an impact the
political impasse is having on the business community. Finally, one of the more
obscure but effective EU indicators — Belgium’s leading economic index
registered a strong recovery from —10.9 in August to —5.6 in September. Since
tiny Belgium exports 75% of its GDP to the EU nations its serves as very
accurate gauge of future EU demand
Yen
“Japan’s consumer prices should start rising
above year-ago levels around October and enter an uptrend next year, although
the rises would likely be modest.”
Kiyohiko Nishimura,
Bank of Japan Board Member.
Wednesday, September 21, 2005 10:16 GMT
Oil Hampers Yen
The Yen fell this week as a Japanese government
report showed the trade balance by almost 80% from a year ago as increasing oil
prices drove up the value of imports in August.
Last week was not all doom as gloom however, as
convenience store sales figures dropped by 1.3% as compared to last month’s drop
of 4.7%. Though the number was still contracting at least the trend was in the
right direction, However the Tertiary Index was down by 0.8% despite the market
expecting a 0.9% rise.
This week’s calendar is packed, with sales
figures and industrial order numbers dominating the landscape. Market expects
large retailers sales to be slightly down from last month’s level. If Hurricane
Rita bypassed the refineries this weekend, the Yen could gain strength as oil
prices drop back from their current elevated levels.
British Pound
“A combination of weak consumer spending and
challenging world markets is weighing on UK manufacturing, following the
sector’s contraction over the first half of the year. Cost pressures from high
oil and transportation prices will only serve to depress profits further.”
Ian McCafferty,
CBI’s Chief Economic Adviser
Thursday, September 22, 2005 15:39 GMT
The Dive Continues
The pound took a tumble last week and broke the
1.8000 figure on poor UK data. The CBI’s manufacturing orders book balance was
at —27 showing sharply falling orders. The data turned attention once again to
the possibility of a interest rate cut in November despite the BOE choosing to
keep rates at 4.50% in September’s meeting.
The one positive of the week was that House
prices fell at the slowest pace for almost a year in August after the BOE’s rate
cut revived confidence in the housing market. The RICS house price balance rose
to —26 in August from —34 in July.
GDP numbers and current account figures will
dominate this week. If economic growth is lower than market expectations and the
current account deficit for the second quarter increases, expect further
downward pressure on the Cable.
Swiss Franc
Swissie continued to record the worst performance
of all the majors, despite the best fundamentals in the field. The Franc lost
more than 100 pips in its average daily price over the course of the week. A
quiet news week in Switzerland meant that markets were primarily focused on the
FOMC’s Tuesday meeting. The swissie with its miniscule 75bp interest rate is
becoming the victim of carry funding and that dynamic may not end until SNB
begins to tighten.
The main story this week saw Swiss trade balance
fall to 0.08B from last month’s level of 0.74 B deepening Swissie’s gloom. The
lone bright spot was real retail sales figures that showed a 5.5% increase in
July.
The Franc will wait and watch the effects of
Hurricane Rita this weekend. Next week is a slow news week with only two
releases scheduled, the consumption and leading indicators respectively. This
would mean the Swissie will be driven by oil prices and subsequent USD
reactions.
Boris Schlossberg serves as Senior Currency
Strategist with Forex Capital Markets in New York, the largest retail forex
market maker in the world. He is a monthly contributor to SFO Magazine with
articles focused on understanding proper risk management, trader psychology and
true market structure. He is also a featured expert at
www.fxstreet.com and a frequent
commentator for the Marketwatch From Dow Jones Currency and Bond Report
sections.