Euro rebounds vs the Dollar, here’s why
US Dollar
For our readers who were trading during the
European session, the price action was extremely exciting as the EURUSD made a
fresh 3 month high and then reversed the entire down move by the open of the US
markets. Our US traders on the other hand contended with continued range trading
as the dollar sold off in response to a combination of profit taking and bottom
fishing by Euro bulls. US housing data released this morning for the month of
September was very much in favor of a continued dollar rally with housing
starts, building permits and mortgage applications all rising smartly.
However, as we have warned, the risk for a
housing market slowdown grows as the market becomes even more overextended. The
Beige Book report released yesterday validated our belief that the housing
market is already beginning to slow with the New York, Boston, Chicago and
Kansas City regions all reporting that homes either remained on the market for a
longer period of time or that inventories were increasing. The report in general
was slightly less optimistic than the market may have been expecting as the
dollar continued to slide in the late afternoon session. Although all districts
reported expanding activity, they also noted that the pace of growth was only
“moderate or gradual†with local retail sales falling short of expectations and
consumer confidence sliding.
However, by the same token, all of the districts
also reported widespread increases in prices. Not only were gasoline prices
higher but goods that may be indirectly affected by energy prices such as
building materials and shipping have also increased. As a result, even though
the outlook for the economy seems to be softer going into the November 1st FOMC
meeting, inflation is still so much of a concern that the report did little to
dent rate hike expectations. According to speeches by Fed Presidents Kohn and
Pianalto, the rate hikes must go on. Kohn said that the Fed has not reached a
point where they can stop raising rates while Pianalto confirmed that the
central bank’s best policy is to keep raising interest rates gradually.
Therefore any retracements in the dollar will probably me limited to the 1.2050
level against the Euro.
Euro
The Euro is rebounding as the market continues to
ponder if the ECB will be delivering its first rate hike in over 2 years in
2006. This morning, an exceptionally strong Eurozone industrial production
number helped the EUR/USD reverse earlier losses. Although activity in Germany
contracted, improvements in France, Italy and Spain more than compensated for
the difference.
Although any rate hikes will be done with
caution, the ECB is already thinking ahead. Chief Economist Issing said
yesterday that headline inflation was most likely going to sit above 2.00% for
most of next year due to high oil prices. The June 2006 Euribor contracts are
already gradually pricing in a higher possibility of a rate hike. As a result,
the market is transfixed on when the central bank will makes it first move and
if it really is next year whether it will come at a time when the Fed is ready
to take a pause. If so, this could be extremely positive for the EUR/USD in
2006.
British Pound
The British pound was one of the market’s biggest
movers yesterday as the currency pair shot higher. There has been a lot of
volatility in the pound recently with daily ranges nearly double that of the
Euro. The much-anticipated minutes from the October monetary policy meeting
indicated that the committee voted 9-0 to keep rates on hold. The market had
actually expected the vote to be split 8-1 with the dissenting voter favoring a
rate cut, so the unanimous decision was taken as mildly hawkish.
The short-term outlook for growth and inflation
remain unchanged, but some members felt that the risks for a weakness outweighed
that of growth. Therefore the central bank still remains neutral with a slight
dovish bias. BoE MPC member Lambert confirmed this bias when he said that the
market may be “too optimistic†about growth and targeting for “too highâ€
inflation. So for the time being, unless we have another major shock to the
global economy, a stabilizing housing market as well as improving consumer
spending could keep the central bank’s hands tied for the remainder of the year.
Japanese Yen
After coming just a hair shy of the 116 level,
USD/JPY has spent most the day in the red as bulls take profits after this past
week’s impressive rally. The dollar’s growing carry advantage seems to continue
to favor the USD/JPY pair and the Japanese seem to have no problem watching
their currency slide. Yesterday, Japan’s Chief Cabinet Secretary Hosoda said
that he doesn’t think that the yen’s value is a big problem and that the
Ministry of Finance is not considering intervention.
With the weaker currency stimulating the economy,
the BoJ has no reason to want to step in yet. Meanwhile speculation for a rate
hike next year by the BoJ was dealt a minor blow yesterday when Deputy Governor
Iwata said that even if consumer prices move into the green next year, the
central bank could leave its easier monetary policy intact. The Nikkei also
dropped over 200 points overnight, suggesting that the stock market mania may be
fading.
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.