My forecasts for the 4 major currencies
US Dollar
The dollar is firmer once again as the Katrina
induced jitteriness in the markets continues to subside. Yesterday afternoon we
posed the question of whether the Fed could deliver a mid-cycle pause. This
morning, there was an article in the Wall Street Journal that examined the very
same topic. There seems to be a lot of dissent within the Fed itself as some Fed
officials believe that it would appear “unseemly†to raise rates so soon after a
national tragedy while others believe that it would be a “mistake for the Fed to
subordinate its goals of low inflation and maximum growth to political
considerations.†They also fear that “pausing for non-economic reasons could
actually undermine confidence by suggesting that the Fed is more worried about
the economy than it actually is.â€
Bottom-line, it appears that the smooth
sailing to 4% rates is behind us and for now, there is a lot of uncertainty
surrounding the September meeting and accompanying statement. According to the
people who responded to a poll posted on the bottom of
DailyFX.com, 40% of the 330 respondents expect
rates to be increased to 4.00% by year end while another 30% expect only one
more rate hike to 3.75%. Jobless claims fell 1k, but the improvement was largely
ignored since most of Katrina victims have yet to get a chance last week to file
for benefits. Consumer credit also fell far short of expectations, rising only
$4.4 billion compared to the market’s forecast for an $11.2 billion increase.
Since the decline came primarily from less credit card debt, consumers are
either cutting back purchases or using lower interest rate debt such as home
equity loans to pay off higher interest rate debt.
Euro
Hawkish comments from the ECB failed to lift the
Euro today. The central bank’s monthly bulletin highlighted the need for
continued vigilance, a word used frequently by ECB President Trichet when
dealing with inflationary pressures. At the moment however, they do not see any
significant buildup in inflationary pressures that needs immediate attention.
They are paying particular attention to the rise in oil prices for any signs of
second round inflation pressures. The central bank also believes that the rise
in energy prices will have a negative impact on growth. ECB member Weber took
the bulletin one step further and said that the negative impact of higher oil
prices on demand cannot be offset by monetary policy. He adds that if the
business cycle changes and growth picks up, then policy would no longer be
“appropriate.†The clear hawkish bias of the central bank confirms that if there
ever were a move on rates, it would certainly be to the upside.
British Pound
As expected, the Bank of England voted to keep
interest rates steady at 4.50 percent after cutting them 25 basis points last
month, for the first time in two years. Although widely anticipated, the
decision may be indicative of a shift in monetary policy as officials are now
holding steadfast to their hawkish ideology and passing on previous concerns of
slumping consumer demand. For Europe’s second largest economy, consumption has
remained sluggish, declining in the previous month by 0.3 percent and ultimately
leaving the annual comparison at a mere 1.8 percent rise. Instead, Governor King
and his fellow central bankers have taken in to consideration two main factors
in keeping rates constant, lending to speculation that rates will be moving
higher in the near term rather than lower. First and foremost, benchmark
inflation targets have been breached. Since the last meeting, inflation in the
United Kingdom has reached an eight-year high of 2.3 percent, effectively
bypassing the previous 2 percent target. A product of increases in crude oil and
energy prices, economists continue to further their estimates on the growing
strength of price increases ahead of yearend. This has prompted Governor King to
argue that lowering the rate would effectively send consumer prices higher in
the face of rising energy costs. Secondly, concerns over a further decline in
the housing market have abated. According to yesterday’s measure released by the
HBOS Plc, housing valuations picked up in the month. Although the report was
contrary to an earlier print by Nationwide, the fact that the two are at ends
suggests that the housing market has stabilized at the moment from their
previous declines, creating upside potential. Ultimately, this poses an
interesting scenario for the economy in the next couple of months, especially if
output and consumer demand continue to be as weak.
Japanese Yen
Further bearish undertones were felt in the
Japanese yen today as the lack of any real positive releases spurred the
underlying currency lower. Core machinery orders fell less than expected, but
the 4.3% drop still took a bite out of June’s impressive rise. Traders are
mostly focused on this Sunday’s elections. The Eco Watchers Survey was basically
unchanged, as yen traders centered their attention on the Bank of Japan monetary
policy report. Expected to hold rates steady, policy officials reiterated the
soundness of the world’s second largest economy with expectations remaining high
that consumer demand will pick up and further underpin growth prospects. These
are fairly bullish comments in the face of rising oil prices. Perhaps this is
mostly related to the fact that policy maker themselves remain undecided as to
the definitive effects of the recent pickup in the price of crude oil, citing
that the economy as a whole has held up against such shocks. BOJ Governor
Toshihiko Fukui additionally assured that the bank would continue to monitor the
adverse effects of rising prices on the domestic economy as well as its global
partners. Subsequently, the bank left reserve targets unchanged as well as
keeping its monthly purchases of government fixed income at $11 billion.
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.