Momentum traders should follow this market
US Dollar
Even in the face of weaker economic data, the US
dollar remains unfazed. Consumer confidence fell by the largest amount in 15
years as Hurricane Katrina drove oil prices to a record high. With confidence at
such weak levels, it remains to be seen whether consumer spending can also hold
up. Although oil prices have retraced since Katrina, it is above $65 a barrel at
the moment, which means that consumers must still be feeling the pain.
Additionally, even though existing home sales increased in August, yesterday’s
new home sales report indicated that purchases fell 9.9%.
For the most part, the Euro spent most of the day
testing the psychologically important 1.20 level. Comments by Fed President
Yellen were taken as slightly dollar bullish. She said that the Fed must keep
its pledge to control inflation, which the market took as another hint that
there may be more rate hikes in the pipeline. Yellen however, is not a voting
member of the FOMC.
Greenspan was also on the wires today but he
refrained from making any new comments. He took the opportunity to once again
warn about Americans’ disregard for growing credit risk. Greenspan said that
“History cautions that extended periods of low concern about credit risk have
invariably been followed by reversal with an attendant fall in the prices of
risky assets.” Although he did not directly say which market he is talking
about, it is clear that he is referring to the housing market. According to the
Wall Street Journal, Greenspan personally supervised research on consumer
borrowing habits and according to his analysis, American consumers have been
extremely dependent on home equity loans to fuel their spending, which means
that a rise in mortgage rates could throw quite a setback to consumer spending.
Of course, the dollar has completely shrugged off
his warnings once again. Momentum continues to drive the slide in the EURUSD
along with continued repatriation flows related to the Homeland Investment Act.
Part of the reason why traders are focusing on the HIA flows now is because the
bulk of the repatriation did not occur until May of this year, when the
government clarified the tax law. It is also estimated that 10-15% of US
corporation use September 30th as their year-end, which means that those
corporations may be rushing to take advantage of the lower tax rate. Yet, HIA
repatriation should continue into year-end, which means that it could continue
to provide a stimulus for the dollar.
Euro
The Euro extended its slide against the dollar
with prices having briefly traded below the 1.2000 level before spending most of
the day struggling to gain strength. Economic data released today was mostly
euro positive but unsurprisingly, the dollar took the reins from the Euro. The
German IFO business climate index for September jumped from 95.4 to 96.0, which
should have been euro positive. The market had actually expected confidence to
dip, but the data is somewhat distorting since some of the responses were
received prior to the election results. The fear is that the inconclusive
election may cause sentiment in October to take a turn for the worse. Money
supply also grew by 8.1% in the month of August, which confirms the ECB’s
concerns that inflation is increasing. With the supply of goods and services
stagnating, the Eurozone could hardly afford such a rapid pace of money supply
growth without raising red flags within the ECB. However, for the most part,
this should do little to shift the ECB’s stance, which is hawkish but with no
room to raise rates.
British Pound
A silver lining looks to have been cast on the
British economy as today’s data gave plenty for pound bulls to be happy about.
Second quarter business investment rose on both a seasonally adjusted and annual
comparison. Notably, investment increased by 4.2 percent on the year compared
with a previous 2.2 percent increase. What this means now is that upward
revisions may be considered when the overall gross domestic product figures are
released tomorrow. Granted the figure may not be upwardly revised as much as
some would optimistically hope for, but it is an upward revision nonetheless.
Couple the recent figure with the previous month’s housing data and a stagnant
consumer spending picture and you have a recipe for a potential turnaround of
the current economic environment. Ultimately, sentiment is now running mildly
higher that the economy may be on the up and up as we head into the end of the
year. Compared with previous notions of a continued downturn, no other example
of this flip is more noticeable as the benchmark equity market, hitting fresh
four-year highs. Ultimately, it should be interesting to see if this brighter
sentiment can filter through to consumer’s penchants for consumption as we head
into the holiday season just a couple of months away.
Japanese Yen
No economic news for the world’s second largest
economy today. So some may ask, what’s driving the Japanese yen lower on the
session to the tune of approximately 140 pips. The answer lies in the increasing
idea that was presented by our team earlier on in the year, the carry trade
notion. After further hawkish sentiment was confirmed by Federal Reserve Bank
President Thomas Hoenig, traders are now seeking to make the increasingly wide
interest rate differential between the greenback and yen, to the tune of 375
basis points currently. Set aside a slight and probable retracement tomorrow,
caveat emptor reigns over the market with traders still anticipating key
economic data for the Japanese economy later this week. Among those most
important, market participants will consider consumer price index and retail
trade data. Although we have witnessed continued slides in both figures, there
still remains the possibility that an upside surprise could turn yen bears on
their heads. Contributing to this notion is the ever-present rise in benchmark
equities. Although not necessarily considered a positive overall indicator of
economic health, the fact of the matter remains, individuals with higher valued
portfolios tend to spend more. This would ultimately fit one of the last pieces
of the puzzle that central bankers and economists have been clamoring for,
finally uplifting the Asian tiger economy.
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.