- British Pound Down as Bank of England Likely to Remain Neutral
- Euro Gains Amidst Signs European Central Bank May Wind Down Liquidity Programs
- Japanese Yen Dominates as Equities Fall, Bank of Japan Sees Upside Inflation Risks
- New Zealand Dollar Down as Currency’s Appreciation Becomes a Political Concern
US Dollar Remains in Downtrend Despite Gains – High Event Risk Next Week
The US dollar index ended Friday below 75.75, where there is falling trendline resistance drawn from the July 8 high, meaning the currency’s downtrend remains in place. In the coming week, US markets will be closed on Thursday for the Thanksgiving holiday and will close early on Friday, and as a result, volumes will be lower than usual, which may contribute to either flat price movements or extremely choppy trade. The latter may dominate, though, as event risk will be very high all week:
On Monday, the National Association of Realtors’ (NAR) index of existing home sales is expected to have risen 2.3 percent in the month of October to an annual rate of 5.7 million, the highest in just over two years. Other factors to keep in mind are supply levels and median prices, both of which have fallen steadily to 7.8 months and $174,900, respectively.
On Tuesday at 8:30 ET, the second round of third quarter GDP results for the US are anticipated to be disappointing as the index may be revised down to an annualized 2.9 percent from 3.5 percent. That said, such a result would still mark the first expansion in the economy in five quarters and the best reading in two years. At 10:00 ET, the November reading of the Conference Board’s measure of US consumer confidence is expected to slip to a six-month low of 47.0 from 47.7, and overall, there are some downside risks for this report. At 14:00 ET, the minutes from the Federal Reserve’s last meeting on November 3 and 4 will be released.
Following that meeting, the US dollar fell as they announced that they had left the fed funds rate unchanged at 0.25 percent, as expected, and stated that rates were like to remain “exceptionally low” for an “extended period.” If the minutes reflect a perceived focus on exit strategies, there is potential for the greenback to rally, but if the FOMC members prove to be uneasy about the outlook for growth or the need to expand quantitative easing down the road, the currency is likely to tumble.
On Wednesday, US durable goods orders is projected to show a 0.5 percent increase in October following a 1.4 percent increase in September (revised from 1.0 percent), and excluding transportation the index is forecasted to rise by 0.7 percent. There may be some downside risks, though, for the non-defense aircraft orders component as Boeing orders fell further during October.
British Pound Down as Bank of England Likely to Remain Neutral
The British pound came under pressure across the majors on Friday, and though there was no new data on hand, the implications of Wednesday’s release of the Bank of England’s meeting minutes from the start of the month are still taking their toll. The vote count from the BOE’s last policy decision - in which the MPC left the Bank Rate at 0.50 percent and expanded their Asset Purchase Facility (APF) by £25 billion to £200 billion - showed that one member wanted to increase the APF by £40 billion while another didn’t want to change the program at all. This suggests that the BOE may be open to expanding the APF later on, and evidence of this will only be amplified by disappointing news. On Wednesday, the second reading of UK GDP for the third quarter is anticipated to be revised slightly higher to a quarterly rate of -0.3 percent from -0.4 percent, and an annual rate of -5.1 percent from -5.2 percent. This will continue to reflect the sixth straight quarter of contraction, and the only way the British pound is likely to respond in a positive way is if GDP surprisingly rises on a quarterly basis.
Related: Discuss the British Pound in the DailyFX Forum
Euro Gains Amidst Signs European Central Bank May Wind Down Liquidity Programs
The euro gained against the British pound, New Zealand dollar, Canadian dollar, and Swiss franc following news that the European Central Bank has started to take steps toward moving away from its liquidity-boosting programs as they issued more restrictive rules on the collateral that will be accepted against loans after March 1, 2010. Additionally, ECB President Jean-Claude Trichet reiterated that in an effort to avoid reviving inflation pressures, they will gradually remove the money pumped into the economy, and indicated at the beginning of the month that the ECB won’t renew its 12-month auctions of unlimited cash after December. The more hawkish tone has led Credit Suisse overnight index swap (OIS) rates to price in 62 basis points worth of rate hikes by the ECB over the next 12 months, up from 55.7 on Thursday.
Related: Discuss the Euro in the DailyFX Forum
Japanese Yen Dominates as Equities Fall, Bank of Japan Sees Upside Inflation Risks
The Bank of Japan left rates unchanged at 0.1 percent, as expected, but while Japan's deputy prime minister Naoto Kan was saying, "We want the BoJ to extend support on the monetary policy front in overcoming deflation," the central bank was more focused on the possibility that increasing commodity prices will lead inflation to rise more than expected. Though it’s rather clear that the Japanese government would prefer that the BoJ continue to hold a more accommodative monetary policy stance, the central bank is an independent body, and their concerns about inflation suggest an end to their quantitative easing efforts could be nearing an end.
New Zealand Dollar Down as Currency’s Appreciation Becomes a Political Concern
The New Zealand dollar was one of the weakest major currencies on Friday, falling nearly 1 percent versus the Japanese yen and US dollar, on a combination of two factors: signs of government interference in central bank policies and broad carry trade declines.
New Zealand's Labour Party leader Phil Goff said that he is ending bipartisan support for inflation targeting as the primary policy objective of the Reserve Bank of New Zealand, suggesting politicians are blaming the appreciation of the currency on the central bank’s setting of interest rates. According to Goff, 95 percent of everything farms produce is exported, so the higher rate of the New Zealand dollar exchange rate “undermines the competitiveness of…prices in destination markets.” While this is a fair argument, the independence of a nation’s central bank is usually seen as a sign of economic stability, and if government officials try to push this point further, the New Zealand dollar is likely to fall further. Most people understand that a little verbal jawboning by government and central bank officials is often enough to move markets, at least for a brief time, and at the end of the day, that may just be Goff’s strategy.
Related: Discuss the Canadian Dollar in the DailyFX Forum
