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Daily Market Commentary

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US Dollar: Unfazed By Economic Data

Tue, Dec 23 2008, 22:41 GMT
by Kathy Lien

GFT

US Dollar: Unfazed By Economic Data

The US dollar appears to be unfazed by this morning’s mixed economic reports.  Thin trading conditions continue to dominate in the currency market, leading to inconsistent trading for the US dollar.  The greenback strengthened against the Japanese Yen and British pound but weakened against the Euro.  The latest reports on the US economy were weak but not as weak as the market had expected.  There was the potential for really bad numbers and the fact that they did not materialize has actually helped the dollar.  

Consumer Confidence Improves, Home Sales Remain Weak

Third quarter GDP remained unrevised at -0.5 percent even though personal consumption slipped and core prices eased. The global recession and the stronger dollar could take a big bite out corporate earnings and growth which may translate into weaker fourth quarter earnings.  Investors are far more worried about the Q4 numbers than e Q3. The housing market also remains weak with new home sales falling for the fourth consecutive month and existing home sales falling by the largest amount on record. Sharp discounts on new homes have been helping to slow the falling pace of demand. The one piece of good news that we did see this morning was consumer confidence which was revised upwards in the month of December. Given that almost everyone knows someone that has been laid off, the price of gasoline is the only reason to cheer this holiday season. Prices at the pump have fallen close to 60 percent from its summer highs. For drivers, lower gas prices is like a tax cut. At a time when salaries are being frozen and bonuses are being reduced, a tax cut in the form of lower gasoline prices has made consumers less pessimistic

Durable Goods, Personal Income and Spending

The rest of the US economic data that is due out this week will all be released on Wednesday.  This includes durable goods, personal income, personal spending, the PCE deflator and jobless claims.  Like today’s data, these reports are expected to mostly reflect the weakness of the US economy.   The manufacturing sector has been struggling and will probably continue to struggle with the recent strength of the US dollar.  We expect this to be reflected in fourth quarter earnings.  However, with that in mind trading will be particularly light tomorrow since it is Christmas Eve.  The NYSE closes at 1pm while most products on the CME close at noon.  The foreign exchange markets close at 3:00pm ET and then all of the financial markets are closed on Christmas Day.  

EUR/USD: COMMENTS FROM TRICHET KEEPS EURO BID

The Euro was one of the few currencies to strengthen against the US dollar thanks to comments from European Central Bank President Trichet.  This month, the Euro’s rally has been driven primarily by speculation that the ECB may leave interest rates on hold in January after cutting 175bp.  However the 13 percent rally in the EUR/USD since the beginning of the month has pared back the speculation significantly since the currency’s appreciation acts like a rate hike for the Eurozone economy. This afternoon, Trichet’s comments suggest that a rate cut in January is still not a done deal.  More specifically he needs to see how the 175bp of easing has impacted the economy.  Economic data was also stronger than the market expected with French consumer spending, Italian retail sales and the Eurozone current account surprising to the upside.  As we indicated in yesterday’s Daily Currency Focus, the improvement in the trade balance suggests stronger a current account number.  We also said that the Euro’s uptrend remains intact and this will continue to be the case until the currency breaks 1.3750.  There are no Eurozone reports due for release for the rest of the week which means that there is nothing to threaten the current trend in the EUR/USD.

GBP/USD: FIVE TRADING DAYS

The British pound has now weakened for the fifth consecutive day in a row against the US dollar.  The only currency that the pound seems to be doing well against is the Japanese Yen and even then, the rally is nominal considering the fact that the currency pair has fallen 1300 pips this month.  UK economic data was mixed.  Third quarter GDP was revised down from 0.5 to 0.6 percent while the current deficit widened to GBP 7.7B.  The largest contraction in growth in 18 years drove the British pound lower against both the US dollar and the Euro.  Even though the current account deficit surprised to the upside, trade is still deteriorating.  Home loans also fell to the lowest level since 1994, representing a 60 percent decline from 2007.  With the UK recession deeper than the market had expected, we expect the Bank of England to continue to cut interest rates to at least 1.50 percent, matching Canadian levels.

USD/CAD: GDP ON TAP

The commodity pairs were mixed throughout the day. The New Zealand Dollar and Australian Dollar depreciated against the U.S. Dollar as commodity prices continued their downtrend. The Australian Conference Leading Index, which forecasts short to medium term outlook for the economy, came in at -0.5% reflecting a slowdown in the economy.  We reported yesterday that GDP contracted for the third consecutive quarter in New Zealand.  Meanwhile the Canadian dollar actually advanced against the greenback ahead of GDP, which is scheduled for release tomorrow.  This may be partly due to the stimulus measures taken by the Canadian government who plan on buying back commercial paper to provide liquidity for their financial markets and counteract the credit crunch.  Prime Minister Stephen Harper is also preparing to propose a stimulus plan in the amount of $20.5 Billion, in order to limit the recession which is scheduled to persist throughout 2009.   A sharp drop in retail sales and trade should trigger a contraction in GDP.

USD/JPY: TOYOTA IS A CASUALTY OF YEN STRENGTH

The Japanese Yen weakened against nearly all of the major currencies as the Dow Jones Industrial Average tumbled 100 points.  Toyota, the world’s largest car maker has been a casualty of Yen strength.  They reported their first lost in 70 years as sales plummeted and the Yen soared.  The toxic combination of a weak economy and a 16 percent rise in the currency against the US dollar has been disastrous for the automaker.  Although Toyota is probably the most high profile, they are certainly not the only major Japanese corporation to be hit by the double whammy.  Expect more losses to be reported in the coming months.  As a result, there continues to be talk of currency intervention, which would be the first in 4 years for the Bank of Japan.  We continue to believe that physical intervention will be the BoJ’s last option, but as the economy weakens and Japanese companies suffer, that option may become more likely.  This evening, Japan is set to announce its Trade Balance which is projected to be weak. Japanese exports have fallen, largely due to the increase of Yen as well as global recession.  Further, the BSI is set to be released, which will confirm a dull outlook on the large industry output.

USD/CAD: Currency in Play for Next 24 Hours

The currency in play for the next 24 hours will be the USD/CAD. Canada is set to release its GDP at 8:30AM EST or 13:30GMT. While, the United States is scheduled to release its Durable Goods Order along with Personal Consumption at the same time. USD/CAD is currently in the Range Trading Zone which is established through the Bollinger Bands. With holidays looming around the corner, the liquidity should dwindle, resulting in relatively stable moves. Resistance is originating at 1.2400, which is 50% retracement of October high and December low that proved to be effective on December 19. Furthermore, the price is a psychological level, in addition to 20-day SMA. Short term resistance is placed at the 1.2260, which is the 78.6% retracement of October high and December low, along with the high on the day. The support is placed at the 1.1980, which is first standard deviation of the Bollinger Bands. The break of support will place the pair in the Bollinger Band Sell Zone and negate the upward momentum.

Published on  Tue, Dec 23 2008, 22:45 GMT