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Wednesday September 21, 2005 - 20:42:49 GMT
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EUR/USD Traders Wonder Which is Worse - the Hurricane in the US or the Political Crisis in Germany

DailyFX Fundamentals 09-21-05

· EUR/USD Traders Wonder Which is Worse - the Hurricane in the US or the Political Crisis in Germany
· Strong French Consumer Spending Lifts Euro
· Yen Rallies as Koizumi Gets Appointed for Another Term

US Dollar

Now that the FOMC meeting is behind us, the dollar has weakened across the board against the majors. These days, we feel more like meterologists than strategists - Hurricane Rita was just upgraded to a Category 5 hurricane and the evacuations are beginning in both Texas and Louisiana. The eye of the storm could pass over Houston, which is the home of some very important refineries. If those refineries are damaged, it could cause another upsurge in oil prices. Yet even if the damage is minimal, a category 5 hurricane will certainly cause some evacuations of refineries in the Gulf – which would halt production at a time when it is already at tight capacity. Furthermore, the recovery of the refineries that were damaged by Hurricane Katrina will probably be put on hold as well. A quarter of the nation’s natural gas and oil supplies are located in the Gulf of Mexico. Dow Jones reports that 26% of US refining capacity is at risk. While this remains one of the key developments that we are watching, our immediate focus tomorrow morning will be the jobless claims report. Last week, claims increased to 398k. This week, the estimate is for claims to reach 450k. Katrina’s impact should be fully felt in the jobless claims report and looking at the range of estimates they are much more realistic this time around with the highest forecast at 550k and the low forecast at 325k. If you recall, last week, the high estimate was a whopping 800k. This means that should jobless claims come in much higher than 450k, most traders would be taken by surprise, which could result in a sharp sell-off in the dollar. Alternatively, if claims come in below 450k, the market would take it as a confirmation of the government’s view that Katrina’s impact is limited. For the most part though, besides waiting for the jobless claims report, traders will be holding their breath as they watch Rita blow through Texas. With landfall not expected until Saturday, we expect continued uncertainty in the markets.

Euro

After two weeks of losses, we finally saw a day of meaningful gains in the EURUSD. Although uncertainty in the US was the primary catalyst for the rally, strong French consumer spending also helped to lift the euro. To the surprise of most traders, French consumer spending increased by the fastest pace in 16 months. This is a glimmer of hope for an ailing economy. Until today, data out of the Eurozone suggested that Germany was responsible for most of the region’s growth, but the latest piece of data from France shows that unemployment and discounting has had a positive impact on consumer spending. Although we are somewhat optimistic, it is important to note that spending in the second quarter fell by the largest amount in 8 years, which means that this rise could also be nothing more than a rebound. Shifting over to politics, there is a growing possibility now that neither Merkel or Schroeder will be Chancellor. The political crisis in Germany continues to deepen, raising the question of which is worse – the potential hurricane disaster in the US or the political disaster in Europe.

British Pound

Propping interest in the pound sterling today, Bank of England policy makers voted unanimously to keep rates unchanged at the current 4.50 percent, according to the minutes of the September 7-8 meeting. Citing that inflationary concerns remain a persistent consideration, Governor Mervyn King and company remain wary as further rises in oil “posed an upside risk to the inflation projection.” Members additionally noted that consumer spending figures remained weaker for the time being. However, the overall number may have been under reported as near term revisions may be considered as British travelers’ spending abroad was not included. Coupled with housing data yesterday, sterling bulls have much to happy about. Two of the three main factors of concern in the United Kingdom economy are now displaying some directional bias. Inflation, although rising to record highs, looks to be well contained barring any sudden sparks in energy prices. Additionally, housing valuations seem to be bottoming out with sporadic signs of consumer, although an outright vault higher may be slightly premature at this time. However, one thing remains a thorn in the side in many an optimist. Consumers still remain relatively cautious as higher energy bills and steep housing payments still plague wallets that were once filled with disposable income. Until the time comes when individuals can freely give into their consumption habits, this may be the first of a line of passes by central bankers.

Japanese Yen

Anticipation mounts for yen traders as both the merchandise trade balance and tertiary industry index reports are set for release later today. Granted that results are expected to be mixed at best, a positive turn in the trade surplus as well as a less than expected drop in the tertiary index will be to the glee of yen bulls. In any case, fueling the rise today, Japanese Prime Minister Junichiro Koizumi was appointed to another term during a special parliamentary session. Following his landslide victory just a couple of weeks ago, the incumbent prime minister won as 340 parliamentarians voted in his favor with 114 selecting the opposing leader Seiji Maehara. With an overwhelming victory, it is suggested that Koizumi’s popularity in the lower house remains formidable and as a result builds the hope of fully implemented financial reform in the economy, considerably yen bullish. Foreign investors seem to agree as the Nikkei benchmark index once again broke to fresh four year highs on the day. Closing at 13,196, current momentum is running high for Japanese shares as investors continue to bet on a near term turnaround. However, until there is a confirmed foundation built on consumer spending and further business investment, the underlying spot looks to continue its staid action in the near term.

 

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