These 3 factors are driving the Dollar
US Dollar
If you thought Monday was quiet, yesterday you
could hear a pin drop. For the second day in a row, we had no significant US
data on the calendar that could have shifted market sentiment.
The dollar rallied strongly in the late Asian
session, hitting a high against the Euro of 1.1710. Once US traders joined the
market however, we saw a great deal of profit taking as the dollar gave back
most of its gains. The majority of the big banks are saying that the latest move
can be attributed to position squaring and this makes perfect sense since dollar
bulls have raked in 6.6 percent or over 800 pips over the past 2 months.
Today should be much of the same with only
wholesale inventories wholesale sales on the US calendar. From the looks of it
though, the dollar rally against the Euro appears to be losing steam and with no
major catalyst until Thursday, there could be little to push the Euro to even
further lows. Oil prices are worth watching though since every Wednesday we get
supply data.
Traders have been closely eyeing the recent move
in crude prices below $60. Prices rebounded yesterday, but today will be much
more telling. Any meaningful up ticks in crude prices will have the press
raising warning flags about how high oil prices will hurt the US consumer in the
winter season. In the meantime though, its still all about yields.
Euro
The Euro hit a two year low against the dollar
before licking its wounds. The riots in France are continuing to get out of hand
as the French government invoked a 50-year law that allows for curfews where
needed. Reports of arson in Berlin and Brussels are also spurring worries that
unrest seen in the French riots may have spread to minority communities
elsewhere in Europe. This is weighing heavily on the Euro at the moment and
should continue to until we see some calming in the situation. Investors also
worry that spreading political unrest will make it even more difficult for the
European Central Bank to raise rates anytime soon — one more reason to dump the
currency.
Adding to the turmoil, the ECB is under pressure
to forgo a rate hike at its next meeting. After ECB President Jean-Claude
Trichet announced that the bank was ready to raise rates “at any time†to keep
inflation in check, government officials and industry representatives from
across the Euro-zone began to argue against the decision. These groups point out
that core inflation is completely under control and that the huge jump in oil
prices was the force behind the rise in the overall price indexes.
Finance ministers and businesses alike feel that
the ECB should not abandon its six-decade low borrowing rate yet as it will hurt
already very shaky economic growth. Trichet would not comment after his meeting
with business and labor leaders and government officials in Brussels yesterday
however a member of the ECB governing council Yves Mersch hinted that a rate
hike was still a possibility, allowing the Euro to recover a bit of strength. We
however continue to believe that any rate increases will not happen until the
first quarter of next year at the earliest.
British Pound
The British pound reached a 3 month low against
the dollar as the combination of weak growth and disappointing retail data hit
the pair. Traders are already looking forward to Thursday’s rate decision, where
they expected another stay in rates. However, soft data released yesterday is
leading to further speculation that the first rate cut did not do enough to
jump-start the economy and another cut may come in the first quarter of 2006.
The NIESR announced its estimate for GDP growth
in the three months to October as only 0.4 percent, matching its estimate for
the prior three month period and in line with the estimate of a mere 1.7 percent
growth for 2005. Despite this low growth which could put pressure on the MPC to
attempt to lend a hand to the economy with a rate cut, the NIESR stated with its
release that a rate cut would be inappropriate at this time and over the medium
term, they actually see rate hikes as more likely than cuts, in line with the
policies of other major central banks.
Also, the British Retail consortium reported a
drop of 0.2 percent in like-for-like sales in October from the year prior as
long-lasting warm weather cuts into fall clothing sales. This is the seventh
consecutive fall in annual retail sales however it is the least severe drop seen
since March of this year, hopefully indicating that the worst is finally over
for the faltering retail sector. Consumers continue to be cautious though,
opting for smaller ticket items and essentials over expensive electronics.
The decline in the housing market is also hurting
furniture sales. The suffering felt by retailers for months is now being passed
on to wholesalers and are having a broader effect on the economy as a whole.
Retailers are hoping for a pick up in sales before the critical holiday shopping
season however they are worried they may need to begin holiday sales early in
order to spark demand.
Japanese Yen
The Japanese yen has continued to recover
steadily from its recent lows against the dollar with the USD/JPY pair sliding
for the second consecutive day. Japan only gave one release yesterday, which was
the official reserve assts for October. This is the eighth fall in 11-months as
reserves were at $841.8 billion in October down from $843.6 billion in
September. Foreign currency reserves in the country reached an all time high in
August and, despite the 2 consecutive falls, the country still holds the largest
reserves in the world. Officials detailed that the largest contributor to the
fall was the rise in yields of US treasuries which caused a drop in prices. The
reserve is watched very closely due to its size, as an intervention in the
policy could move the FX markets dramatically. Monetary authorities usually only
intervene in the case of a currency appreciation that threatens to hurt Japanese
exports. They have not done so since March of last year.
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.