Sentiment may be shifting against the Dollar, here’s why
US Dollar
The dollar took another nosedive yesterday
following a dose of weaker economic data and some lingering pessimism stemming
from Monday’s announcement that Ben Bernanke will be the next Fed Chairman.
After months of shoving reality aside, traders will now have to deal with the
realization that Greenspan will not be with us forever. Judging from the
write-ups in the press, it seems that the market still does not have its hands
completely around Bernanke and his policies. Some are pointing to his past
saying that he will be a big proponent against deflation while others are saying
that he will not accept runaway inflation, especially since he has been a
long-time advocate of inflation targeting.
In our opinion, the market should be thankful
that we avoided a possible surge in volatility which could have happened if
President Bush picked a more unknown candidate. Yet it seems that the
international market has not taken the news that the Fed Chairman has been
picked by the current President all that well, even though we think he was
probably the safest choice.
Meanwhile consumer confidence in the month of
October took another tumble to 85.0, which is the lowest reading in 2 years. The
only glimmer of hope was the existing home sales report which remains unchanged
in the month of September, suggesting that the Katrina impact was limited. The
most important item that we want to mention and our traders have been waiting
quite some time for is the flip in the FXCM Speculative Sentiment Index for the
EURUSD. The ratio flipped from net long to net short, which is the first signal
that we may have finally reached a real bottom in the EURUSD.
Euro
The Euro was lifted yesterday thanks to some
encouraging pieces of economic data. The biggest news of the day was the German
IFO business climate survey — which saw sharp improvements in both the current
sentiment and expectation components for the month of October. The survey is now
at its highest level in five years even amidst the political confusion currently
running through the country. These numbers affirm that the Euro-zone’s largest
economy is indeed recovering more strongly and bolster expectations that the ECB
will raise rates toward the beginning of 2006.
Rate hike expectations were also supported by
comments from ECB Weber who called for “great vigilance†with regards to price
stability. Germany also released the preliminary consumer price index numbers
for October. The index was expected to drop 0.1 percent from September but
instead it rose by 0.1 percent. Annual inflation, expected to rise 2.3 percent,
was actually up 2.4 percent. The final numbers for October are due in
mid-November.
Import price numbers in Germany rose in September
as well, up 0.5 percent from August and 5.1 percent from a year earlier,
considerably higher than expected. These figures, despite predictions otherwise,
show that inflation is continuing to plague Europe and could put pressure on the
ECB to raise rates as early as the first quarter of next year.
British Pound
Like the Euro, broad dollar weakness has pushed
the British pound higher as traders pound the dollar after reports of lower than
expected US consumer confidence numbers and mounting speculation that the Bank
of England will not cut rates for the rest of the year as inflation rises and
the housing market begins to recover.
Only one economic release was announced this
morning from Britain. UK car production, seasonally adjusted, was shown to have
risen in the three months leading into September by 5.6 percent after dropping a
revised 1 percent in August. This rise was due to a sharp increase in demand for
exports, making up for the decline in domestic demand. The recovery in auto
production after hitting a low in June, could be signaling a slightly recovery
in the British economy.
As inflationary pressures mount, the Bank of
England has its hands somewhat tied as far as lowering the interest rates to
spur growth. In fact, in his testimony in front of to the House of Lords
Economic Affairs Committee, BoE Governor King expressed his concerns about
rising inflation. However, after dropping rates in August, there have been one
or two sparkles of hope that the economy could be improving itself. If
production figures continue to be released in the same result as the auto
production, a recovery may be looming.
Japanese Yen
The Japanese yen strengthened against the dollar
for the second consecutive day. Sales data was released mixed this morning.
September supermarket sales dropped for the nineteenth straight month, falling
1.9 percent after falling 2.9 percent in August. The decline can be partially
blamed on low sales of fall and winter items as summer heat lasted well into the
first month of fall. However, nationwide department store sales rose for the
first time in two months by 0.8 percent, after declining 0.7 percent in August.
Rising wages and a booming economy is allowing
Japanese consumers to shed some of their traditionally frugal spending habits,
adding to domestic demand which the government is relying upon to compensate for
waning exports. The Bank of Japan also released it quarterly survey from its
regional bureaus this morning. Consistent with last week’s reports from the
research divisions, these reports show that Japan’s economy is continuing to
grow gradually, however improvement has been uneven across the country. The
ministry of finance also warned about the increasing economic impact of high oil
prices at a time when Japan is pushing to lessen its reliance on oil imports.
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.