Dollar traders need to watch these 2 things today
US Dollar
There were two major themes riding in the markets today – the
upcoming Federal Reserve meeting and the brewing storm off the coast of Florida.
For the time being, the developing Hurricane has lost out on the battle of what
is more important to dollar traders against the Fed rate decision for the majors
excluding the commodity currencies. Against the Australian, New Zealand and the
Canadian dollars, the greenback sold off following a $4 rise in oil prices. More
specifically, USD/CAD is trading at new 13-year lows.
Workers who were rebuilding the damage to the rigs in the Gulf
are being evacuated along with residents in the Florida Keys as the National
Hurricane Center warn that Tropical Storm Rita could strengthen to Hurricane
Strength as early as Thursday. Weather 2000 Inc. predicted that Rita “could
impact 4 times as many energy rigs and platforms as Katrina and Ivan combined.â€
If this proves to be true, we could see oil make new all time highs once again
next week. Natural gas prices have already closed at the highest level on record
and remember, most Americans heat their homes using natural gas, so if prices do
not retrace, we could see a brutal winter in more ways than one.
However, for the time being, the market is tackling one event
risk at a time and with the storm still developing, the more immediate task is
to assess the impact of the Fed rate decision. Fed fund futures are currently
pricing in a 94% probability that the Fed will be raising interest rates for the
11th time to 3.75%. Of the 1,300 people who took the DailyFX interest rate poll,
89% expect interest rates to be increased again this year, which means that even
Katrina can’t stop the Fed. Most of the pre-Katrina economic data has been
strong and in the words of Dallas Fed President Fisher who is a voting member of
the FOMC, they “don’t really know†how Katrina might alter the outlook for the
US economy. Greenspan and company will probably remain in wait and see mode
until more Katrina inclusive data is released. The Federal Reserve is worried
about inflation about also sensitive to potential impact that Katrina and now
Rita may have on the economy. The statement itself remains the main focus — any
signs of a possible pause in November would be dollar bearish while significant
downplaying of Katrina’s impact could be interpreted as dollar positive.
Euro
The Euro has taken a sharp dive after disappointments at the
polls. Neither Merkel or Schroeder managed to capture a significant lead, with
the CDU (Merkel’s party) taking 35.2% of the votes while the SPD (Schroeder’s
party) took in 34.3% of the votes, leaving them both with a near equal amount of
seats in Parliament. Schroeder’s popularity managed to rebound strongly over the
past week. The battle continues to heat up as both leaders say they have a
mandate to be Chancellor. Even though elections are still to be held in Dresden
in 2 weeks, it should not make a big difference in the balance of the power. The
next step will be for both parties to form a government through different
alliances or coalitions. Once they have done so, their choices would be reviewed
by the Parliament who will then elect the next Chancellor. The parties have 30
days to form their governments, which means that for at least the next few
weeks, politics will remain on the headlines in Europe and continue to create
uncertainty for the Euro.
British Pound
Showing that house price inflation eased yet again, the
Rightmove housing price report reflected valuations declining another 0.4% in
the August 7th to September 10th survey period. However, the number of sales
rose sharply in the corresponding period and contributes to the notion that the
overall market slowdown may have reached a temporary bottom with current
activity considered a byproduct of August’s interest rate cuts. What’s
interesting is that the most recent Rightmove housing price report is being
compared to two subsequent reports released earlier. Our readers will remember
that according to building society Nationwide, annual house prices also showed
house price inflation at the lowest rate in a decade, at 2.3% in August.
Comparatively, however, British mortgage lender Halifax reported prices that
rose 1.6%, the fastest pace in almost a year. As a result, although taking into
consideration that all three reports are based on comparative evidence, industry
experts are now leaning towards a rebalance of the sector, albeit temporarily.
Additionally notable has been the volume seen in the past month. Known for its
relatively light volume, similar to the December month, the slight pickup in
August has confirmed previous notions that consumers were awaiting lower
interest rates in order to take part in any real estate transactions.
Ultimately, this may constitute potential upside considerations for the sector
as we approach yearend and may, in fact, lend to up ticks in lackluster consumer
spending figures.
Japanese Yen
With benchmark markets closed and economic releases
nonexistent on the day, traders kept the underlying spot currency in a tight
range, approximately 50 pips, in both the overnight and U.S. trading sessions.
With activity thin in observance of “Respect for the Aged Dayâ€, traders will be
looking ahead, rather, to tomorrow’s convenience store sales data. Declining
4.7% in the previous period, sales are expected to have dropped once again in
light of last week’s better than expected consumer confidence figures and rising
wage growth. However, still weighing on the minds of consumers is the idea of
further increases in energy costs and current tax legislation. Tying this into
today’s holiday theme, recent government legislation, in order to provide for an
aging population, may in fact be the undoing of a potential turnaround in
consumer activity. According to recent revisions, policy makers have actually
axed the nationwide tax rebate, which ultimately places a hefty financial burden
on the individual. Even more taxing has been the increase in pension
contributions as well as a subsequent decrease in distributions allowed.
Ultimately, crimping disposal income circulation in the economy, policy makers
may want to change their providence for the “aged†if future generations are to
be taken care of as well.
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.