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Dollar Index Penetrates Downtrend

Thu, Aug 14 2008, 22:59 GMT
by Hans Nilsson

CMS Forex

Dollar Index Penetrates Downtrend

• The dollar rose against its rivals Thursday despite the highest US inflation rate in 17 years and higher-thanexpected jobless claims. Investors shook off stagflationary readings, betting the Federal Reserve would get help from falling commodity prices in inflation fight. The greenback was supported by lower energy prices and higher US equity prices. The yen fell on increased risk appetite as US stocks rose for the first time in three days after regulators loosened restrictions on Fannie Mae and Freddie Mac to help revive the mortgage industry. The euro dropped to the lowest level since February 26 and broke the 1.49-handle support as Europe’s economic growth contracted in the second quarter. Sterling fell to a new 22-month low on speculation the weak UK economic outlook will force the Bank of England to cut interest rates despite the worsening inflation condition. The Australian and Canadian dollars declined as commodity prices resumed their descent.


• The AUD/USD fell today after Reserve Bank of Australia Deputy Governor Ric Battellino said “we cannot wait to see a fall in inflation before we start cutting rates because by then it would be too late.” After reaching a 25- year high on July 15, the AUD/USD has fallen for four weeks. The pair, oversold on the daily and weekly RSI, has reached support from the well-established uptrend that started in 2006. This will possibly lead to a shortterm lift so we buy the pair for a possible bounce.

Financial and Economic News and Comments

US & Canada

• The US dollar index broke the 76-area resistance from the long-term downtrend that started early 2006. This is an important development implying a higher dollar. Resistance exists at 77.7 and a consolidation at this level is possible before a test of the 81-area resistance.

• The US consumer price index increased a more-than-forecast 0.8% m/m in July, following June’s 1.1% m/m rise, data from the Labor Department showed. The CPI jumped 5.6% y/y, the highest since January 1991. About half the CPI increase was due to energy prices, which rose 4.0% m/m in July, up 29.3% y/y. Food and beverage prices increased 0.9% m/m in July, up 5.8% y/y. Excluding food and energy, the core CPI increased a more-than-expected 0.3% m/m for a second-straight month in July, and rose 2.5% y/y, still well above the Federal Reserve’s long-term goal of 1.5%-2.0% y/y. Core inflation rose at a 3.5% annual rate in the past three months. Excluding just energy, the CPI increased 0.4% m/m in July, up 3.0% y/y. Real average hourly earnings fell 0.6% m/m in July, down 2.5% y/y. With energy and commodity prices on the retreat in August, the Fed, watching closely the CPI data, is unlikely to hike interest rates anytime soon as the US economy struggles with weak consumer spending and rising unemployment.

• US initial jobless claims dropped 10,000 to 450,000 after seasonal adjustments in the week ended August 9, from an upwardly revised 460,000 the prior week, the Labor Department said. The 4-week average of new jobless claims rose 19,500 to 440,500, the highest level since April 2002 and well above the 400,000 mark that usually indicates recessions. Nevertheless, recent federal legislation extending the duration of unemployment benefits has temporarily tainted the relationship between claims and economic growth. Continuing claims surged 114,000 to 3.42 million in the week ended August 2, the most since November 2003, suggesting it takes longer for the unemployed to find new work. The 4-week average of continuing claims rose 75,250 to 3.27 million, the most since December 2003.

Europe

• Europe’s GDP fell 0.2% q/q in Q2 2008, indicating the European economy contracted for the first time since the euro’s introduction in 1999, after increasing 0.7% q/q in Q1, Eurostat reported. The year-on-year growth rate slowed for a third straight quarter, to 1.5% y/y.

• The euro zone’s harmonised index of consumer prices (HICP) rose a final 4.0% y/y in July, less than the 4.1% y/y initially estimated but still twice the European Central Bank’s 2.0% y/y limit, data from Eurostat showed. The HICP fell 0.2% m/m in July. Prices excluding energy, food, alcohol and tobacco – a flavored measure of core inflation – increase 1.7% y/y in July, compared with June’s 1.8% y/y rise. Prices excluding energy and unprocessed food – a measure of core inflation closely watched by the ECB – rose 2.5% y/y, compared with June’s 2.5% y/y increase.


• Germany’s GDP fell a seasonally adjusted 0.5% q/q in Q2, its first decline in almost four years, after rising a downwardly revised 1.3% q/q in Q1, according to preliminary figures from the Federal Statistics Office.


• Germany’s CPI rose 0.6% m/m in July, up 3.3% y/y, according to final figures from the Federal Statistics Office. The HICP rose 0.7% m/m in July and increased 3.5% y/y in Germany.

Asia-Pacific

• China’s industrial production decelerated to a lower-than-expected 14.7% y/y in July, the slowest pace since February 2007, on weaker export orders and factory shutdowns to clear the air for the Olympic Games, China’s statistics bureau said.

• Reserve Bank of Australia Deputy Governor Ric Battellino said the RBA can cut interest rates as consumers have trimmed spending enough to cool the Australian economy and inflation. “We cannot wait to see a fall in inflation before we start cutting rates because by then it would be too late,” Battellino said. “We try to be preemptive when we start tightening and pre-emptive when we start easing.”

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Published on  Thu, Aug 14 2008, 23:07 GMT