Politics poses a risk to the Dollar, here’s why
US Dollar
Another day devoid of any significant US economic
data gave the dollar a chance to recuperate Tuesday’s extensive losses. The next
two days should be much more interesting with a busy US economic calendar that
includes durable goods, new home sales, and the final third quarter GDP figures.
Yet in addition to barrage of data, politics could also shake up the dollar.
Special Counsel Patrick Fitzgerald is expected to
announce a series of indictments against some of the top officials in the US
government over the leaking of information that led to the disclosure of an
undercover CIA agent. There is growing fear that the Vice President may also be
implicated, which if becomes the case, could be very bearish for the US dollar.
Taking a walk through history back to Nixon’s
era, in the month that the Senate established a committee to investigate the
Watergate scandal (February 1973), the dollar fell 10 percent against the
Deutschemark. Over the next five months, the dollar depreciated by a total of 30
percent. The dollar recuperated some of its losses in the following year, but
once Nixon announced his resignation in August 1974, the dollar took a nosedive
once again, falling another 15 percent over the next six months. Although it is
far too premature to speculate that the current probe into the CIA leak could
unfold into something as grave as Watergate, any whiff of political uncertainty
could give dollars bulls (who have made tremendous amount of profits this year)
a good reason to bail out early.
Euro
It has been a quiet day both here in the US and
in Europe. The only pieces of economic data released from the Eurozone this
morning was Italian business confidence and hourly wages. Business confidence
improved in the month of October thanks to a weaker Euro and lower oil prices.
Although this fell short of expectations, it is still the highest level recorded
in the past 11 months. Wages also edged higher by 0.3 percent in the month of
September, which helps to support the central bank’s staunchly hawkish bias.
In fact, the Euribor curve continues to shift
higher suggesting that the market is indeed gradually pricing in a growing
likelihood of higher interest rates next year. Aside from Italy, improvements in
business confidence have also been reported out of Germany and France. Overall,
it is becoming increasingly clear that we are seeing the Eurozone benefit
significantly from a triple dose of stimulus from low interest rates, a weaker
currency as well as falling oil prices. When oil prices were rallying towards
$70, the lower value of the Euro helped to offset some of the strain that it put
on the economy. Now that oil prices have reversed course, the stimulus is even
more powerful.
British Pound
Following yesterday’s explosive 230 pip rally,
the dollar has retraced over half of its losses against the British pound. The
only piece of data released yesterday was supportive of the move lower. Although
the CBI industrial orders for the month of October increased from -27 to -25, it
still remains net negative with the export orders and output components
continuing to deteriorate. According to the deputy director general of the CBI,
“Domestic orders have continued to decline, reflecting the tough conditions
prevailing on the high street.†They also noted the rising cost of raw materials
and energy prices have cut into profit margins and forced some firms to slash
prices.
Businesses in the UK also continue to grow more
pessimistic according to a quarterly survey that was released by the group
yesterday as well. Yet not all news was bad news — possible M&A deals should be
somewhat supportive for the pound. Ericsson announced a GBP1.2 billion takeover
of Marconi’s UK assets while Germany’s RWE announced plans to float Thames
Water, which is valued at approximately GBP10 billion.
Japanese Yen
After two days of gains, the Japanese yen buckled
under dollar strength yesterday. China attempted to clarify their recent
comments on Yuan revaluation — the Vice Governor of the PBoC said that further
renminbi appreciation was a “long-term perspective†and does not necessarily
mean that their next move is right around the corner. We remain skeptical that
this truly is the case since the PBoC has a habit of downplaying the immediate
need for revaluation and then turn around to surprise the markets.
Meanwhile the Japanese Yen also weakened on the
back of uridashi bond issuances at the end of the week that could total US$450
million. Uridashi bonds are issued when companies want to denominate their debt
in a higher yielding currency and then offer it to Japanese investors. These are
popular for the pure reason that the yield offered is far higher than the yield
that Japanese investors can earn at home. Meanwhile, the trade surplus released
last night for the month of September rebounded after the sharp dip in August.
Over the next 2 days, we will be receiving a lot
of Japanese economic data that could shed more light on how well the economy has
been performing. Recent data has already suggested that the country’s health is
gradually improving. We will get to see if this is really the case beginning
with retail sales data for the month of September followed by labor market and
inflation data tomorrow night.
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.