Thursday June 19, 2008 - 23:45:54 GMT
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Forex Blog - US Dollar: Unfazed by Mixed Economic Data
â€˘ SNB Leaves Interest Rates Unchanged, EU Worried About Inflation
â€˘ British Pound Soars as Consumer Spending Growth Hits Record Levels
US Dollar: Unfazed by Mixed Economic Data
Despite mixed economic data, the US dollar strengthened against both
the Euro and Japanese Yen. The Philadelphia Fed index was unambiguously
weak but leading indicators beat expectations. The manufacturing sector
is supposed to be the single biggest beneficiary of dollar weakness but
unfortunately that has not been the case. The slowdown in global growth
and the worst housing market slump in more than 15 years have hurt
production in the Philadelphia and New York regions. Unless there is a
big jump in activity in the Chicago region, manufacturing is expected
to contract nationally. The Philly Fed number really underscores the
difficulties facing the US economy, which is slow growth and high
inflation. Even though the activity index fell from -10 to -17.1, the
input price component jumped to 69.3, the highest level in 28 years.
Jobless claims were worst than the market, but they improved from the
prior month, suggesting that the labor market has not worsened. There
will be no major economic data until the FOMC rate decision on Tuesday.
An interest rate hike is not expected, but the Fed will need to
increase their degree of hawkishness if they plan on raising interest
rates in the fall. The exact timing of the rate hike is still up in the
air. Fed fund futures are pricing in a 99.9 percent chance of quarter
point rate hike in Sept and an 89 percent chance that interest rates
will be at 2.50 percent by the end of the year (Have Forecasts for Fed Rate Hikes Gone Too Far?).
Of course, we have seen these expectations for interest rates change on
a dime and they will change again with 3 non-farm payroll reports and
multiple inflation reports before the September meeting. For the time
being, traders buying dollars need to be selective. Although the
greenback has strengthened against the Japanese Yen and Euro, it has
weakened against the British pound and the currencies of the commodity
SNB Leaves Interest Rates Unchanged, EU Worried About Inflation
The Swiss National Bank left interest rates unchanged at 2.75 percent,
which was right in line with the marketâ€™s expectations. Although the
central bank said that they would â€śremain vigilant,â€ť they also lowered
their 2010 growth forecasts and warned that activity could continue to
slow. On inflation, they are just as worried as everyone else, which is
why they hiked their 2009 inflation forecast from 1.4 to 1.7 percent.
However they felt that the rise in inflation was â€śtransitoryâ€ť in
nature, which the market perceived as dovish, triggering a broad based
sell-off in the Swiss franc. This offset any bullishness that would
have come from the stronger than expected trade balance report and took
CHF/JPY well off its 17 year highs. Meanwhile the Euro also came under
selling pressure despite the lack of any meaningful economic data.
Eurogroup Junker echoed the same concerns about inflation as the ECB,
but with the FOMC meeting next Tuesday, the comments failed to have a
meaningful reaction on the Euro.
Visit the Euro Currency Room for resources dedicated specifically to the Euro.
British Pound Soars as Consumer Spending Growth Hits Record Levels
Based upon the degree of retail sales growth in the month of May, the
Bank of England should have nothing to worry about. Consumer spending
grew by 3.5 percent, the largest rise on record, driving the British
pound higher against all of the major currency pairs. Despite rising
gasoline prices and falling house prices, the unseasonably warm weather
last month drove robust demand for food and clothing. This number
indicates that the UK consumer is far more resilient than anyone had
previously anticipated and if the degree of spending continues, the
Bank of England could raise interest rates before the end of the year.
The only clue that retail sales could have been firm was the BRC retail
sales report. In yesterdayâ€™s Daily Fundamentals,
we said that the â€śrise in the BRC retail sales report suggests that
consumer spending will be strong.â€ť Conflicting reports on the economy
makes the Bank of Englandâ€™s job even more difficult. Although they may
be more compelled to raise rates because of the report, there are still
many signs of weakness. Therefore expect rates to be left unchanged for
at least a few more months until the BoE can make a clearer assessment
of the economic outlook.
Visit the British Pound Currency Room for resources dedicated specifically to the British Pound.
More Gains for the Canadian, Australian and New Zealand Dollars
Despite lower commodity prices and dollar strength, the Australian, New
Zealand and Canadian dollars extended their gains against the
greenback. Since the beginning of the week, the three commodity
producing countries have seen their currencies quietly trend higher and
so far, there has been nothing to threaten that trend. Canadian
consumer prices grew more than expected last month, which has helped to
push the Canadian dollar higher. Retail sales are due for release
tomorrow and they are also expected to be firm given the sharp rise in
wholesale sales. New Zealand will be reporting the growth of visitors
in the month of May. Even though it is a secondary report that does not
move markets, it tends to be a good barometer of economic health since
tourism is the single biggest export industry in the country, far
surpassing the dairy industry in earnings. Last month, tourism fell 11
percent. If that decline continues, the NZD economy could be in for
Tell us what you think on the Canadian dollar Forum.
Mild Gains in the Dow Lead to Mixed Trading Day in Yen Crosses
The Japanese Yen weakened against the US dollar, British pound and
commodity producing currencies but strengthened against the Euro and
Swiss Franc. The all industry activity index was the only piece of
economic data released from Japan last night and despite the strains on
the Japanese economy, activity increased in April. Throughout this past
week, USD/JPY has held up very well. Even though it has been struggling
to close above 108, there is a decent chance that a break may happen to
the upside over the next few trading days
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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