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Forex Research - Will This Be A Dollar Positive Week?
â€˘ Is the Euro Becoming Immune to Hawkish Comments?
â€˘ British Pound Resumes Weakness Despite Stronger Housing Market Data
Will This Be A Dollar Positive Week?
The US dollar has started the week strong thanks to the better than expected leading indicators report. For the second month in a row, leading indicators increased, suggesting that the US economy may not be in a recession. Although the numbers are definitely encouraging, we believe that recession or no recession is just a matter of semantics. The bigger question is whether or not the current downturn will be shallow. With
the Fed signaling an intention to pause when they meet to discuss
monetary policy in June, the market is looking for any data that would
confirm that stability is the new course for the US economy. The
LEI numbers are certainly encouraging even though we are slightly
suspicious of whether the improvements are more than just a rebound. Building
permits, stock prices and the interest rate spread were the biggest
gainers, but the two former components saw a big decline the prior month. The US
economy is still at risk for slower growth, but that should not draw
away from the fact that the market perceives the news as dollar bullish. This strength should continue into tomorrowâ€™s producer price report. Not only have food and oil prices increased last month, but the import price report also surprised to the upside. The
dollar should remain firm in the beginning week as there is nothing to
threaten its rise until Friday when we are expecting the existing home
sales report. Traders still need to be cautious
of what they buy because even though we believe that the dollar should
strengthen against the Euro this week, it could continue to sell off
against the Canadian dollar.
Is the Euro Becoming Immune to Hawkish Comments?
The Euro weakened against the US dollar today despite hawkish comments from ECB President Trichet. The
central bank head reminded the markets about the danger of letting
second-round effects get out of hand and compared the recent rise in
food and energy prices with the 1970s oil shock. He said that cutting interest rates now could lead to more serious problems in the future. Yet the Euro has barely budged on the comments, suggesting that traders are starting to become immune to the hawkish rhetoric. Part of the reason for this lack of response is the recent turn in Eurozone economic data. Everyone
is beginning to wonder how much longer the ECB will be able to remain
hawkish given the gradual deterioration in the Eurozone economy. This
week will be a big test with the ZEW survey, the IFO report and the PMI
numbers due for release. The market is actually expecting analyst
sentiment to improve and business confidence to deteriorate. Germany factory orders and industrial
production have all declined, confirming that activity is slowing; it
would be a surprise if analystsâ€™ sentiment actually managed to improve. In addition to the ZEW survey, German producer prices are due for release tomorrow morning. The
rise in wholesale prices suggest that producer prices will surprise to
the upside, lending credibility to the ECBâ€™s inflation battle.
Visit the Euro Currency Room for resources dedicated specifically to the Euro.
British Pound Resumes Weakness Despite Stronger Housing Market Data
Good news rarely comes out of the UK housing market these days and therefore we are surprised to see the lack of a response to the stronger housing market numbers. This
may be partially due to the fact that even though online property
search firm Rightmove reported 1.2 percent rise in house prices during
the month of May, they also criticized UK homeowners for raising prices in the current market environment. Even Bank of England Governor King has warned that prices are set to fall further, but sellers have refused to adjust their prices to more realistic levels. If this trend continues, housing market inventory will build and eventually prices will have to come down. Either way, a rate cut by the BoE is not in the cards right now according to the interest rate market. The spread between 2 and 10 year gilts are at the brink of inverting for the first time in 6 months, which means that no one expects the Bank of England to cut interest rates anytime soon. We
expect this same concern about inflationary pressures to be reflected
in Wednesdayâ€™s release of the minutes from the latest Bank of England
Visit the British Pound Currency Room for resources dedicated specifically to the British Pound.
Australian Dollar Hits 24 Year High, Canadian Dollar Continues to Rise
dollar hit a fresh 24 year high at the open of the Asian trading
session, but those gains were quickly erased following weaker Australian and New Zealand economic data. Imports decreased 3.0 percent in the month of April, reflecting the softer demand for external goods by Australians. The New Zealand dollar on the other hand is suffering from yet another piece of disappointing economic data. The service sector PMI index slipped from 50.8 to 48.9 in the month of April, indicating that activity is now contracting. Last
week, we saw a decline in retail sales and based upon the latest the
drop in the employment component of the PMI report, the labor market
and domestic demand should remain weak. The Canadian dollar on the other hand was the only currency that managed to strengthen against the greenback today. There was no economic data released, but we do expect stronger Canadian CPI on Wednesday.
Tell us what you think on the Canadian dollar Forum.
Bank of Japan Expected to Keep Interest Rates Unchanged
With no major economic numbers other than the US leading indicators report released this morning, carry trades have moved in lockstep with the Dow. US stocks were up more than 150 points intraday, triggering a sharp rally in carry trades. However other than USD/JPY and CAD/JPY, none of the Japanese Yen crosses managed to hold onto their earlier gains. The Bank of Japan is expected to leave interest rates unchanged tonight, which should be a nonevent for the Japanese Yen.
Visit the Japanese Yen Currency Room for resources dedicated specifically to the Yen.
By Kathy Lien, Chief Strategist of DailyFX.com
Contact Kathy Lien about this article at [email protected]
Â©2008 DailyFX. All Rights Reserved.
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