Dollar Soars on FOMC Rate Decision
US Dollar
The dollar broke higher following the Federal
Reserve’s eleventh consecutive interest rate hike to 3.75% from 3.50%. The
market latched onto the hawkish tone of the statement and shrug off the
dissenting vote by Fed President Olson. The fact that the Fed left in the
buzzwords “accommodative†and “measured†has injected a new a dose of enthusiasm
into the market. It seems that for the most part, the Fed has paved the way for
another quarter point rate hike in November. Yet, the fact that the Fed
expressed concerns for weakness in “near term†spending, production and
employment data is somewhat concerning since it remains questionable as to
whether the market is ready for a batch of weaker economic data for the month of
September even if conditions are not expected to worsen.
Tropical Strom Rita still poses a threat to the
Gulf States and even though OPEC agreed to make the rest of their reserves
available to consumers, they do not have extra barrels of light sweet crude oil,
which is the grade of oil that can be easily turned into petrol. Meanwhile, it
is interesting to note that Olson’s vote to keep interest rates unchanged is the
first time that we have seen a vote that was not unanimous since June of 2003.
If you recall, it wasn’t too long ago across the pond that before the UK
Monetary Policy Committee lowered rates, there were a few meetings where the
final decision was not unanimous and after 2 meetings, more voters began to sway
away from the neutral stance towards voting in favor of lowering rates — which
was what eventually occurred. Applying this to the US, perhaps, Olson’s
dissenting vote may be more significant than we think.
Euro
The Euro is weaker once again following the
Federal Reserve’s interest rate decision. Taking a look at the only piece of
major economic data released from the Eurozone this morning and we see that the
Germany elections played a big role in dampening sentiment for the month of
September. The ZEW survey of German economic sentiment slipped 11.4 points to
38.6 from 50. Uncertainty about what economic policy will look like in the
months and even years ahead has had a negative impact on investment sentiment.
It appears that investors and analysts also fear that oil prices will sap
domestic demand and Hurricane Katrina will slow global economic progress. So
basically the expectations component deteriorated while the current conditions
component improved. Politics should continue to dominate the headlines until we
can get more clarity on how the new government in Germany will be structured.
British Pound
Another day, another conflicting housing price
report in the United Kingdom. This time around, according to the Royal
Institution of Chartered Surveyors, housing prices fell in the month of August.
However, notably, the price decline fell the slowest in a year as the report
revealed new buyer enquiries actually rose on the month. In addition, completed
sales were also higher for the second month running, bouncing from the 7.5
percent low recorded in the month of February. Ultimately, this placed the
balance of surveyors at a negative 26 percent for the month compared to a
negative 36 percent reading in the prior period. With that said, noticeable
similarities exist between both yesterday’s RICS and Rightmove housing prices
report. Both reports point to continued price decreases. However, the pace at
which these declines are running is beginning to slow in addition to a pickup in
sales and consumer interest in residential property. Now, although rebound in
prices may be a premature notion at this point in time, the fact that
similarities do exist now suggests that the housing market may in fact be
forming a bottom. A result of the first interest rate cuts in over two years,
this bodes well for the economy as the sector has been a persistent concern for
consumers and policy makers alike since sluggishness was first witnessed earlier
this year. Ultimately, with slightly less pressure being applied by the housing
sector, the only thing left to completely ease the mind of a central banker
looks to be consumer spending as pound bulls look to take advantage of the
silver lining.
Japanese Yen
Back from the holiday, traders digested
annualized convenience store sales data for the month of August. To the yen
bull’s utter disappointment, sales on a same store basis fell for the 13th
consecutive month according to the Japan Franchise Association. This now is the
27th monthly decline in the past 30 months and doesn’t reflect well for an
industrialized economy that is supposedly on track to positive expansion. Most
notably in the overall figure, average consumer purchases fell 1.2 percent as
the number of customers remained constant. With continued downside in consumer
figures, this now leaves many to speculate that instead of individual spending
strength, the world’s second largest economy may be fully underpinned by
business investment in the near term as higher oil prices continue to remain a
burden on the average individual’s wallet. Separately, however, foreign
investors look to be furthering their bets on a full recovery as equity
benchmarks reached fresh 4-year highs at the close. Advancing 0.8 percent
higher, the Nikkei 225 Average closed above 13,000 at 13,061.44 as investors
exited out of fixed income instruments. The last time this level was witnessed
was back in 2001.
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.