This Week Should Prove Interesting–Here’s Why
Dollar bears were no doubt squeezed last week
as the move higher in the dollar was more than most could have imagined. The
initial move lower on Friday’s payroll data, followed by a strong move up to
83.75 (short-term resistance) was unexpected to say the least.
Nonetheless, the price action
cannot be argued regardless of the longer-term forecast for the dollar and its’
likely path to lower levels. Right now, we are trading the currencies, not
playing them as a strategic investment. This week should prove interesting,
while data worldwide is light relative to last week, there are a few report we
should pay attention to as possible cues for trades.
US:Â
Wednesday 5:30 PM PDT, November
trade deficit — another record low? -$55.8 bln is consensus, look for a number
far weaker to reverse recent dollar climb
Europe:
ECB meeting on Wednesday. We
see no change in rates or in language accompanying decision. Rates likely to be
on hold through 2005 as inflation remains within the bands set out by ECB.
UK
Mixed data recently with
housing the notable weak sector, combined with pockets of positive data in
retail and industrial production should keep the BoE on hold for the time being.
Australia / New Zealand:
These two countries/currencies
is where we feel the best opportunities both from a trading and strategic
standpoint will be had in 2005 (more trading commentary below)
Monday at 8:30 AM PDT will see
the release of the Australian trade deficit, market expects it to widen to
roughly A$265 mln as imports continue to outpace exports.
Australian job
vacancies/employment data on Wednesday & Thursday both reports expected to show
modest growth.
New Zealand building approvals
and trade deficit on Thursday and Friday. Housing sector should continue to
weaken, while trade deficit will also deteriorate to roughly NZ$700 mln
Outlook for New Zealand:
Last year we had a long
position in AUD/NZD that was a pure play on our view that the aggressive
monetary tightening cycle in New Zealand would eventually work its way through
the system. While the housing sector proved to be resilient to the rise in
rates, housing is now slowing down, pleasing the RBNZ and allowing their
currency to cool and easing pain on the export sector. While our view of a
weaker NZD in 2005 will not be a straight line, we feel that medium-term and
possibly a “core†strategic short in NZD/USD will be in order. Three primary
reasons allow for this conclusion:
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rate spreads/differentials between NZD
and US are contracting
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commodity prices have seen their best
levels for the near-term
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trade deficits are on the radar
screens of all FX traders, and New Zealand’s is slightly worse than the US
The key, as we see it, is the
contraction in rate spreads. While the deficit in New Zealand has been a
problem throughout 2004, most were willing to turn a blind eye as a nice
positive carry was to be had by being long the kiwi. That carry trade is
unwinding and as such, the risk exposure is now much higher. Granted, there is
still a positive carry on NZD/USD, hence large players may be reluctant to short
NZD/USD at this point due to the high cost of carry, but short to medium term
trades will be attractive in the days and weeks ahead.
As always, feel free to send me
your comments and questions.