US Dollar gets a boost from recent data
US Dollar
During the US trading session, the dollar
continued to gain strength against the euro even though it ended the day
virtually unchanged. The trade balance came in much better than expected,
narrowing from an upwardly revised $59.5B to $57.9B for the month of July. The
market had expected the trade deficit to increase due to rising oil prices, but
an up tick in exports to record levels helped to narrow the overall balance.
China has been increasing its appetite for US goods, with exports to the country
also rising to a record high.
It seems as if the effect of higher energy prices
on demand has been more significant than the upward pressure that it is exerting
on input prices. The detail of the release indicates that the demand for
pharmaceuticals, clothing and aircraft have all fallen during month of July. It
is important to reiterate that the trade balance is for July, which means that
it does not include the impact of Katrina.
The move in the dollar suggests that the market
recognizes that the data is delayed and not a particularly reliable indicator of
the health of US economy. This is the same sort of price action that we saw in
the non-farm payrolls number released earlier this month. The trade balance is
expected to get progressively worse over the next few months.
In August, crude oil prices increased 17%. The
closure of the ports in the Gulf States should have had a negative impact on
imports. Meanwhile, producer price growth was also softer than expected, with
the headline index rising only 0.6% in the month of August and core prices
remaining unchanged. This raises the question of whether higher energy prices
are actually having a disinflationary effect on other products.
Euro
Consumer prices in the Eurozone edged higher in
the month of August despite mediocre growth. Today’s report brings forth the
ECB’s tactic to focus their attention on inflation rather than growth — which
has been steadily rising. The French trade deficit increased to EUR 2.6 billion
from EUR 1.3 billion in the month of July. Weak domestic demand has dragged
exports lower once again, which continues to come in contrast to the
improvements that we have been seeing in Germany. At the polls, Merkel and
Schroeder’s party continues to advance head to head, with neither commanding a
strong majority. Tomorrow we have a light Eurozone economic calendar, so all
eyes should be focused on the US Retail sales and Industrial Production reports.
British Pound
Another blow to further interest rate cut
speculation was felt today as inflationary pressures rose above the central
bank’s target for another month. Already above the 2% benchmark at 2.3 %,
consumer prices increased to 2.4% in the month of August, the highest level in
at least 8 years, according to the Office for National Statistics. This means
that given the hawkish ideology of central bankers, concerns over sluggish
consumer spending and staid housing valuations will have to take a back seat
while persistent worries over climbing energy and oil costs move to the
forefront.
Reflective of current difficulties, U.K.
Chancellor Gordon Brown urged other industrial economies to take certain
measures in stabilizing the current prices of oil as certain sectors continue to
be on the decline. Most notably, domestic airlines, where fuel costs constitute
close to 25% of overall inputs, and domestic trucker strikes have grabbed the
attention of policy makers in recent days. Ultimately, this places Governor King
and company in an interesting position with many previously expecting further
rate cuts as called for by several sources including the Confederation of
Business Industry to improve the current economic landscape. In any case,
traders are already siding with the notion of no further cuts for the year as
the implied rate on the December contract currently resides at 4.49%.
Japanese Yen
Disappointing economic figures added to the glee
of yen bears as industrial production for the world’s second largest economy
fell short of consensus estimates. Expected to decline 1.1%, in line with the
previous figure, the most recent data pointed to a 1.2% decline in the month of
July. As a result, sentiment still remains that the once touted economic
recovery remains sluggish at best and may actually be momentarily questionable.
Contributing to overall skepticism has been recent declines in consumer spending
and investment, although capital investment still remains supportive.
On the flipside, the continued rise in the
benchmark Nikkei 225, setting fresh 4 year highs on the session, seems to be
reflective of growing optimism of future gains by global foreign interests
backed by brighter commentary by policy officials in recent days. Additionally,
one cannot forget the increasing probability of forthcoming financial reform in
relation to yesterday’s election win by Prime Minister Koizumi.
Combine all of these factors and you still have a
hint of brighter things to come despite the recently weak economic figures.
Separately, released during the day were minutes from the Bank of Japan’s
monetary meeting on August 8-9th. Although no rate changes were discussed, or
even expected, board members remain steadfast in their watch for signs that
would confirm the end of deflationary conditions in the economy. Notably,
however, two members elected to decrease the current 30-35 trillion yen
liquidity target in order to ramp up activity, but were defeated yet again by
the resounding majority.
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.