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Daily Market Commentary

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US Dollar: Run on The Dollar?

Mon, Dec 29 2008, 23:06 GMT
by Kathy Lien

GFT

Run on The Dollar?

With no US economic data on the calendar today, the dollar weakened against every major currency except for the British pound.  Trading continues to be very thin with commodities being the only products that are really moving.  The tensions in the Middle East have driven oil and gold prices higher.  US stocks also gave back Friday’s gains and remained contained within its weeklong trading range.  

Housing, Manufacturing and Consumer Confidence

Hopefully trading will get a little bit more interesting on Tuesday, when we have the CaseShiller house price index, Chicago PMI report and consumer confidence number due for release. Weaker economic is not a given. Although house prices are expected to continue to fall as homeowners and builders offer discounts to drive sales, we could see an improvement in the Chicago PMI report and consumer confidence.  Manufacturing conditions in the Philadelphia region rebounded this month, which suggests the potential for a similar improvement in Chicago.  Lower gasoline prices have also helped consumer confidence recover according to the University of Michigan’s report last week - the Conference Board’s report should reflect a similar shift in sentiment.  

2009 Risk: Run on the Dollar  

One of the biggest risks facing the US dollar in 2009 is a run on the currency.  The global slowdown has forced many central banks around the world to become internally focused.  This means that any money that they have will be spent on spurring growth domestically instead of funding US spending.  With next to zero yield, a deteriorating balance sheet and the risk of a weaker dollar eroding the notional value of any US investments, there are almost no reasons for foreign investors to load up on US debt.  Having been burned badly by investments in Fannie and Freddie Mac, sovereign wealth funds like China have become skeptical of buying more US paper.  According to an editorial in the state owned newspaper, China Daily, "China's increased purchase of U.S. Treasury securities should not be interpreted as an endorsement of the assumption that the U.S. can borrow its way out of the current financial crisis."  If dollar demand continues to wane, we have yet another reason to expect the dollar to weaken in the first half of next years.

MAJOR REVERSAL

Quiet and thin trading conditions in the foreign exchange market can occasionally lead to wild swings.  This happened in the EUR/USD today, as the currency pair fluctuated within a 400 pip trading range.  At the European open, the EUR/USD raced to a high of 1.4363 on stronger economic data and EUR/GBP buying.  Consumer prices out of Saxony rose 0.3 percent in the month of December, raising the concern the concern that we may see a countrywide uptick in inflationary pressures.  The annualized pace of growth still slowed, but higher prices were also reported for vacation packages, food, clothing and non-alcoholic beverages.  France is one of the few countries within the Eurozone to not fall into a recession in 2008.  Growth in France was unrevised at 0.1 percent in the third quarter.  However the gains in the EUR/USD were short-lived as the currency pair spent the rest of the European and US trading sessions giving back all of its gains to end the day lower.  Retail PMI numbers are due for release tomorrow from Germany, France and the Eurozone as a whole.  Weaker consumer confidence and deterioration in the labor market suggests soft consumer spending in the month of December.

BRITISH POUND SELL-OFF CONTINUES

The British pound has been one of the worst performing currencies this year, having depreciated against every single G10 currency.  The most significant weakest was against the Japanese Yen with GBP/JPY falling 68 percent year to date.  Not a day goes by without growing concerns about the UK economy.  Housing market withdrawal in the third quarter was greater than the market expected, reflecting the strain on UK households. The UK Telegraph also reports that banks could face up to GBP70B in losses on commercial property loans.  More problems in the financial sector will mean more problems for the country as a whole.  There are no major UK economic releases until Friday.   Between now and then, we could see continued weakness in the British pound.  The currency hit a new record low of 0.98 against the Euro today.

RALLY IN OIL DRIVES CAD HIGHER

A rebound in commodity prices has driven the Canadian, Australian and New Zealand dollars higher.  There are no major economic releases from the 3 commodity producing countries this week, which leaves the currencies vulnerable to US dollar and commodity market fluctuations.  The violence in Gaza and worries about threats to crude supplies has pushed oil prices up 5.89 percent, within a whisker of $40 a barrel.  Despite the recovery in the Canadian dollar, the double blow of lower oil prices and weaker demand for automobiles will weigh on Canada’s economy throughout 2009.  More rate cuts are expected from the Bank of Canada as well more fiscal stimulus from the Canadian government. Australia and New Zealand are also expected to continue to cut interest rates, but they are not as sensitive to US growth as Canada and therefore are expected to recover before the US’ northern neighbor.

MERGER TALK IN JAPAN

The weakness of US equities has driven the Japanese Yen higher against the Euro, British pound and US dollar.  Like many countries around the world, no Japanese economic data was released today.  Japan has been hit hard by a strong currency and weaker global growth.  While the British pound has sold off against every major G10 currency, the Japanese Yen has strengthened against all of the same currencies.  In fact, since the beginning of the year, the Yen has appreciated more than 20 percent against 8 out of the 10 G10 currencies.  The strength of the Yen is the main reason why Japan reported a trade deficit this year and Toyota, Japan’s largest car company reported its first loss in 70 years.  Companies across Japan are forced to think of more creative ways to survive which is why 3 Japanese non-life insurance companies are considering a merger.  Despite the bleak outlook for growth, Japan has denied any need for additional fiscal stimulus.  They first want to see how the monetary and fiscal stimulus doled out so far impacts the economy and only then will they consider further stimulus.  

EUR/USD: Currency in Play for Next 24 Hours

The currency in play for the next 24 hours will be the EUR/USD. The Euro zone is scheduled to release Retail Purchasing Index at 9:00 GMT or 4:00AM EST. While the United States will release Consumer Confidence numbers at 15:00 GMT or 10:00AM EST. After appreciating for the first half of the day, EUR/USD experienced a drastic reversal to end the day with an inverted doji/hammer formation.  This has taken the currency out of the Buy Zone, which we determine using Bollinger Bands and into the Range Trading zone.  The EUR/USD has also broken the 10 day SMA, leaving the next level of support at 1.3800, the 38.2% Fibonacci of the October to December rally.  Resistance is at 1.4150, the 23.6% Fibo level.  An increase in the volatility which was experienced by the pair throughout last couple of month could easily lead the price to break any of the aforementioned levels.  

Published on  Mon, Dec 29 2008, 23:09 GMT