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Daily Forex Strategy Briefing

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Dollar Edges Higher

Wed, Aug 20 2008, 22:44 GMT
by Hans Nilsson

CMS Forex

Dollar Edges Higher

• The dollar was mostly higher against its rivals Wednesday despite renewed worries the US government may have to bail out the two mortgage giants Fannie Mae and Freddie Mac. The European currencies were lower on continued worries of Europe’s economic growth outlook. Sterling traded lower, close to the important 1.85 support as minutes of the Bank of England’s August meeting indicated “the upside risk to inflation in the short term had probably eased a little” while the outlook for the UK economy worsened. The Canadian dollar was little changed as Canadian retail sales rose for a fourth consecutive month and crude oil edged higher after US gasoline inventories dropped for a fourth week and Goldman Sachs Group Inc. predicted oil will reach $149 a barrel. The Australian dollar gained modestly for a third day after weeks of sharp losses. The yen fell modestly as US stocks rose on strong earnings from Hewlett-Packard.


• The EUR/USD fell on economic weakness in Europe as eurozone construction output declined and economic climate deteriorated in Western Europe. The pair is oversold, having found short-term support in the 1.46- area, a 6-month low. The EUR/USD may need to trade in the 1.46-1.49 area working off its oversold condition before a test of the significant 1.44-1.45 support, which is the long-term uptrend.

Financial and Economic News and Comments

US & Canada

• Canadian retail sales rose for a fourth straight month in June increasing 0.5% m/m, matching the forecast, to C$36 billion ($33.8 billion), led by higher gasoline prices and clothing purchases, following a downwardly revised 0.3% m/m gain in May, data from Statistics Canada showed. Retail sales rose 4.0% y/y. Excluding automobile and parts dealers, retail sales rose a more-than-expected 1.4% m/m in July, up 6.8% y/y.

• The Canadian leading economic indicators index was unchanged for a second straight month in July, as a measure of housing starts and sales posted its biggest decline since June 2002 while new factory orders rose, Statistics Canada reported.


• The Ifo world economic climate index fell to 73.4 in Q3, indicating confidence in the global economy dropped to the lowest level since October 2001, from 81.4 in Q2, the Ifo Institute for Economic Research reported. The decline was driven by economic climate deterioration in Western Europe and Asia. The world economic situation gauge dropped to 85.8 in Q3 from 96.8 in Q2. The world economic expectations gauge declined to 61.4 from 66.7. “Inflation expectations for 2008 in the US at 3.8% are clearly higher than the price increases for 2007 (2.8%). Also in Western Europe inflation expectations for 2008 at now 3.5% are considerably above inflation registered for 2007 (2.1%). A similar picture was determined for Asia, where inflation expectations for 2008 are nearly three percentage points higher than price increases in 2007 (5.3% vis-à-vis 2.4% in 2007),” Ifo said. In contrast to the previous survey, Ifo reported a rise in central bank interest rates is expected.


• Federal Reserve Bank of Minneapolis President Gary Stern said an oil-price drop may slow inflation, allowing the Fed to “be patient” in considering a change to the federal funds rate. “Now is a good time to be patient because I do think we will see better news on the inflation front,” Stern said in an interview with Bloomberg Television. The Fed will monitor banks’ exposure to preferred shares of Fannie Mae and Freddie Mac, Stern said. “But I don’t think the problem with Fannie and Freddie is just confined to banks that happen to hold their preferred stock.”

Europe

• Eurozone construction output declined 0.6% m/m in June, led by declines in Germany and Spain, following a downwardly revised 0.1% m/m increase in May, Eurostat said. Construction in Germany fell 2.1% m/m and construction in Spain dropped 3.1% m/m in June. Overall euro-area construction output fell 2.4% y/y in June, the biggest drop since March.


• UK manufacturers’ output expectations for the next three months are the weakest for seven years, the latest CBI industrial trends survey showed. The balance of firms expecting their output volume to fall in the coming quarter stood at -13%, the weakest since December 2001 (-28%). The balance of manufacturers expecting prices to rise in the coming three months stood at 31%, slightly lower than the 18-year high recorded in July. Ian McCafferty, CBI chief economic adviser said: “Manufacturers are becoming more downbeat about forthcoming levels of activity but are still having to raise their prices due to the severity of recent cost increases.”


• Bank of England policy makers split three ways in August, with one arguing for higher interest rates to tame inflation and another voting for a rate cut to stave off a recession. Governor Mervyn King and the six other Monetary Policy Committee members voted to keep the benchmark rate at 5.0%. Timothy Besley voted for a rate increase, saying a “pre-emptive” move would help anchor inflation expectations. David Blanchflower called for a rate cut after the BOE lowered growth forecasts, minutes of the BOE August 7 decision showed.

Asia-Pacific

• Japan’s all-industries index declined 0.9% m/m in June, due to sharp declines in industrial output and weaker spending in the services sector, following a 0.4% m/m increase in May, the Ministry of Economy, Trade and Industry said. The all-industries index fell 1.2% y/y in June after declining 0.5% y/y in May. FX Strategy

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Published on  Wed, Aug 20 2008, 22:50 GMT