Here’s why Katrina’s impact may be deeper than anticipated
- Dollar Rebound Limited as Katrina’s
Wrath Proves Worst than Expected - Pound Slides on Weaker Data
- Yen Under Pressure on Larger
Contraction in Household Spending
US Dollar —
Even though the dollar is relatively unchanged, we are already hearing more
reliable word on the actual damage of Hurricane Katrina. Yesterday we had
warned that the optimism in the dollar was premature, perhaps that was related
to expectations for a climb in the Conference Board consumer confidence survey,
which we saw today, but in the overall scheme of things, Katrina’s wrath was
underestimated.
Katrina ended up shutting down 92% of the normal
production in the Gulf and many oil companies such as Chevron have said that
they will not know the full storm damage until later this week. Even though the
Hurricane is over, the worst may not be over for the US dollar. Royal Dutch
Shell has already announced that their platform has suffered damage. Valero,
the nation’s largest independent refinery indicated that it would take up to 2
weeks to restart its St. Charles refinery in Louisiana. With reports of up to
80% of New Orleans under water, it could take days if not weeks for oil
producers and refineries to report final damage. Even if the refineries
sustained little overall damage, the ancillary support system such as roads and
people are still in such a distressed state that in order for operations to
return to normal, people need to be able to get back to their homes first. The
local governments’ priorities are certainly to get their cities back to order
before allowing the million plus people who have evacuated out of Louisiana to
return to their homes, let alone work.
This delay in reopening the refineries at a time
when capacity is already stretched thin could send gasoline prices soaring
towards $80 a barrel. Each additional day that it takes to resume normal oil
production, the more strain the disaster causes on oil prices across the
nation.
We have breached $70 a barrel once again and it
wasn’t the gap higher and quick reversal that the we saw yesterday, but a more
sustained grind higher. It will not be long before gasoline prices across the
nation top $3 a gallon with the more expensive cities charging upwards of $4 a
gallon. Even though consumer confidence rebounded in today’s report from the
Conference Board, we doubt that the sentiment of the average consumer at this
point is really all that more optimistic than last month. The UMich survey is
probably the more accurate indicator this time around. Not only will the
continual rise in gasoline prices take a big bite out of future consumer
spending, but insurers will be paying as much as $26 billion in compensation and
that does not even include the damages done to the oil drilling platforms.
There is no doubt that this will cause Q3 GDP
growth to be much weaker than expected. Meanwhile the Federal Reserve minutes
didn’t give us much new information. The Fed was hawkish on inflation
pressures, which is far from surprising given the rise in oil prices. They also
cautioned about a possible slowdown in house price appreciation and the
potential drag of oil prices on consumer spending. Overall, it leaves them at
the same place that they were at before — which is more rate hikes at a measured
pace.
Eurozone with French housing starts and permits increasing strongly while
Italian producer prices for the month of July was slightly weaker than
expected. The “usual†leak of German unemployment suggests that tomorrow’s
labor market report should show a less than expected 12k decrease in the month
of August – the leak is generally reliable. Tomorrow should be an exciting
day nonetheless with a barrage of US and Eurozone data slated for release.
British Pound – Another day,
another reminder of how economic fundamentals have turned for the United
Kingdom. Once touted for its growth and expansion, Europe’s second largest
economy now teeters on recessionary conditions as slowdowns in housing and
consumer spending have taken their toll. On the Brightside, it seems as though
consumers have been minding their personal finances, decreasing the amount of
spending that is allotted on their lines of credit. Today’s net consumer credit
figure fell more than expected to 1.2 billion pounds. Although still relatively
near last month’s figures, the current report is less than the 1.5 billion
earlier expected. Ultimately, this offers a little bit more ease to policy
makers as concerns over consumer indebtedness have risen in recent months.
However, it seems as though caution among consumers remains persistent according
to the most recent survey published by the Confederation of British Industry.
In the release for August, retail sales fell for the sixth month with 45% of
retailers surveyed reporting a drop in sales compared to a year ago.
Comparatively, 27% responded with an increase. As a result, the balance, an
-18, is the lowest mark since the survey began in 1983 and suggestive that
further pains may be on the horizon before any respite can even be considered.
Adding to the notion has been a confirmed slowdown in the housing sector with
household spending barely rising in the first half of the year. This presents
an interesting environment for policy officials given inflation has risen to an
8 year high. With that said, traders will be anticipating any suggestions
one-way or the other as we approach the next meeting date.
Japanese Yen – Yen woes were felt during the session as traders
pared back positions on largely disappointing economic figures. In particular,
workers’ household spending data and retail sales both fell considerably lower
than consensus estimates, confirming earlier notions that the recovery may not
be as speedy as previously hoped. However, one must remember here that the
world’s second largest economy is in its nascent stages recovering from a
previous recession, and as a result, may need some more time before any
substantiated gains can be mustered. Additionally contributing to the dip
traders witnessed today, the political arena heated up as we approach the newly
called elections in September. Today marks the first day that candidates hit
the road in search of reaching out to constituents as both main competitors,
Prime Minister Koizumi and opposition leader Okada, spoke in front of the
masses. With Koizumi’s lead in the polls diminishing and continual focus on the
heated topic of financial reform, the current situation looks to be adding to
instability in the economy and subsequently the currency. Rest assured,
ultimately, that once there is a resolution, both bears and bulls might breathe
slightly easier.
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.