Think Greenspan won’t raise rates because of Katrina? Think again…
US Dollar
The first thing that traders did after coming
back from their summer vacations was to send the dollar higher. As we said on
Friday, the move last week in the EUR/USD from 1.2175 to 1.2589 was both sharp
and extensive — necessitating a period of consolidation. The heavy driving
season is now behind us and we should see two or three months of respite before
we hit the winter season, when oil and natural gas usage increases once again.
The refineries in the Gulf State are beginning to recover with three of the
twelve refineries that went offline restarting. Europe and Japan have pledged to
send more oil this way.
However, the pace at which the oil can be refined
remains limited until we see the other seven refineries reopen. The price of oil
has come off its high for now, helping the dollar recover some of its losses. In
fact, traders breathed such a big sigh of relief that they sent the stock
markets soaring, posting the biggest one-day gain in the Dow and the NASDAQ
since July. However, whether respite really lasts two or three months remains to
be seen. A sharp rise in the service sector ISM survey from 60.5 to 65.0 also
injected some optimism into the markets, but it is important to keep in mind
that the number was a snapshot of the service sector pre-Hurricane. The ISM
surveys in general usually reflect activity through the third week of the month
and in this case, Hurricane Katrina did not hit until the fourth week of August.
There was also a good deal of chatter about John Berry’s article today
predicting a rate hike on September 20th. We too said on Thursday that Greenspan
will probably go ahead with a quarter point rate hike later this month. He will
most likely spend the next few weeks gathering information to answer a few key
questions — 1) How much have oil prices and Katrina impacted consumer spending?
2) How high will jobless claims rise? 3) Will oil prices continue to remain
above $60 a barrel even following the aftermath of Katrina? – The November
decision is really where the uncertainty lies now and it remains to be seen
whether economic activity will show enough signs of rebounding by that time to
warrant another quarter point rate hike to 4.00%.
Euro
Even though the Eurozone released a series of
stronger economic data this morning, the optimism in the Eurozone recovery
failed to translate into an immediate optimism in the currency. Retail PMI
surveys in Germany, France and Italy all increased in the month of August, while
factory orders in Germany shot higher by a whopping 3.7% m/m in July. The slide
in oil prices and the rebound in the dollar is the primary reason why the Euro
gave back its gains, but there is the possibility that some more astute traders
are already thinking ahead. If you recall, we have been saying that the Eurozone
economy has been improving over the past few months because of the 11% slide in
the EUR/USD since the beginning of this year to July. The sharp decline has even
shielded the Eurozone from the rise in oil prices. Now that the EUR/USD has
rebounded 4% in approximately one month, this stimulus could gradually subside
and the Eurozone, which still has not found a sustainable way to stimulate
growth, could fall in back into its old ways. If this scenario unfolds, it will
not be long before we also hear Europeans gripe about the rise in oil.
British Pound
The market’s attention this week is centered upon
the Bank of England’s rate decision on Thursday. To the dismay of some traders,
recent data fails to make the decision any clearer. According to the Office of
National Statistics, industrial production in the U.K. dipped 0.3 percent,
furthering the overall pessimistic sentiment that we have been seeing lately. In
contrast, for the fourth straight month, the manufacturing component report
ticked higher by 0.1 percent. As a result, with the increase in manufacturing
and rising sentiment, policy officials may pass on another rate cut at this
week’s meeting. Although consumer consumption remains sluggish and housing
valuations staid, policy officials still remain wary and ever hawkish of
previous inflationary concerns as it topped benchmark targets this past year.
Additionally, the fact that the last 25 basis point rate cut was won on a
marginal vote of 5-4 even contributes to the likelihood that the central bank
will stand pat. Ultimately, policy officials remain slightly more optimistic on
the economy as they wait to gauge the full extent of recent consumer
disinterest. However, this may pose further problems down the line as economic
conditions may worsen to such a point leaving monetary policy even more
difficult to rely on. For the time being, the central bank remains in wait and
see mode.
Japanese Yen
According to a Cabinet Office survey released
today, consumer optimism in Japan remains steady. The sentiment index for
ordinary households in the month of July rose slightly below expectations at a
48.1 reading. However, the release is still relatively better than the 46.6
print in the previous month, contributing to the notion that consumption is
still strong in light of the day’s disappointing household spending figures.
According to the report released by the Ministry of Internal Affairs and
Communications, Japanese household spending slipped by a surprising 3.7 percent
in July against an expected decline of 2.8 percent. Although the data may be
perceived as bearish, it may be slightly misleading as most traders will rather
refer to the salaried worker’s report as being more reflective of the
consumption factor. Subsequently, with consumer confidence on the rise, the
disappointing consumption figures may simply be suggestive of a break in
spending rather than a complete slowdown in individual interest. As a result,
there is an increasing belief that the economy will once again be propped up by
domestic demand strength and further capital expenditure instead of the
traditional export market going into yearend.
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.