If important refineries get hit by Rita, here’s what happens next…
US Dollar
Now that the FOMC meeting is behind us, the
dollar has weakened across the board against the majors. These days, we feel
more like meteorologists than strategists – Hurricane Rita was just upgraded to
a Category 5 hurricane and the evacuations are beginning in both Texas and
Louisiana. The eye of the storm could pass over Houston, which is the home of
some very important refineries. If those refineries are damaged, it could cause
another upsurge in oil prices. Yet even if the damage is minimal, a category 5
hurricane will certainly cause some evacuations of refineries in the Gulf —
which would halt production at a time when it is already at tight capacity.
Furthermore, the recovery of the refineries that were damaged by Hurricane
Katrina will probably be put on hold as well. A quarter of the nation’s natural
gas and oil supplies are located in the Gulf of Mexico. Dow Jones reports that
26% of US refining capacity is at risk.
While this remains one of the key developments
that we are watching, our immediate focus today will be the jobless
claims report. Last week, claims increased to 398k. This week, the estimate is
for claims to reach 455k. Katrina’s impact should be fully felt in the jobless
claims report and looking at the range of estimates they are much more realistic
this time around with the highest forecast at 550k and the low forecast at 325k.
If you recall, last week, the high estimate was a whopping 800k. This means that
should jobless claims come in much higher than 455k, most traders would be taken
by surprise, which could result in a sharp sell-off in the dollar.
Alternatively, if claims come in below 455k, the market would take it as a
confirmation of the government’s view that Katrina’s impact is limited. For the
most part though, besides waiting for the jobless claims report, traders will be
holding their breath as they watch Rita blow through Texas. With landfall not
expected until Saturday, we expect continued uncertainty in the markets.
Euro
After two weeks of losses, we finally saw a day
of meaningful gains in the EURUSD. Although uncertainty in the US was the
primary catalyst for the rally, strong French consumer spending also helped to
lift the euro. To the surprise of most traders, French consumer spending
increased by the fastest pace in 16 months. This is a glimmer of hope for an
ailing economy. Until today, data out of the Eurozone suggested that Germany was
responsible for most of the region’s growth, but the latest piece of data from
France shows that unemployment and discounting has had a positive impact on
consumer spending. Although we are somewhat optimistic, it is important to note
that spending in the second quarter fell by the largest amount in 8 years, which
means that this rise could also be nothing more than a rebound. Shifting over to
politics, there is a growing possibility now that neither Merkel nor Schroeder
will be Chancellor. The political crisis in Germany continues to deepen, raising
the question of which is worse — the potential hurricane disaster in the US or
the political disaster in Europe.
British Pound
Propping interest in the pound sterling today,
Bank of England policy makers voted unanimously to keep rates unchanged at the
current 4.50 percent, according to the minutes of the September 7-8 meeting.
Citing that inflationary concerns remain a persistent consideration, Governor
Mervyn King and company remain wary as further rises in oil “posed an upside
risk to the inflation projection.†Members additionally noted that consumer
spending figures remained weaker for the time being. However, the overall number
may have been under reported as near term revisions may be considered as British
travelers’ spending abroad was not included. Coupled with housing data
yesterday, sterling bulls have much to happy about. Two of the three main
factors of concern in the United Kingdom economy are now displaying some
directional bias. Inflation, although rising to record highs, looks to be well
contained barring any sudden sparks in energy prices. Additionally, housing
valuations seem to be bottoming out with sporadic signs of consumer, although an
outright vault higher may be slightly premature at this time. However, one thing
remains a thorn in the side in many an optimist. Consumers still remain
relatively cautious as higher energy bills and steep housing payments still
plague wallets that were once filled with disposable income. Until the time
comes when individuals can freely give into their consumption habits, this may
be the first of a line of passes by central bankers.
Japanese Yen
Anticipation mounts for yen traders as both the
merchandise trade balance and tertiary industry index reports are set for
release later today. Granted that results are expected to be mixed at best, a
positive turn in the trade surplus as well as a less than expected drop in the
tertiary index will be to the glee of yen bulls. In any case, fueling the rise
today, Japanese Prime Minister Junichiro Koizumi was appointed to another term
during a special parliamentary session. Following his landslide victory just a
couple of weeks ago, the incumbent prime minister won as 340 parliamentarians
voted in his favor with 114 selecting the opposing leader Seiji Maehara. With an
overwhelming victory, it is suggested that Koizumi’s popularity in the lower
house remains formidable and as a result builds the hope of fully implemented
financial reform in the economy, considerably yen bullish. Foreign investors
seem to agree as the Nikkei benchmark index once again broke to fresh four-year
highs on the day. Closing at 13,196, current momentum is running high for
Japanese shares as investors continue to bet on a near term turnaround. However,
until there is a confirmed foundation built on consumer spending and further
business investment, the underlying spot looks to continue its staid action in
the near term.
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.