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Wednesday November 29, 2006 - 22:29:05 GMT -

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Forex - Rally in EURUSD Becomes Exhausted After Mixed US Data

DailyFX Fundamentals 11-29-06

By Kathy Lien, Chief Strategist of

• Rally in EURUSD Becomes Exhausted After Mixed US Data
• Japanese Yen Rebounds on Firmer Data
• Commodity Currencies Slide After Horrid Australian Trade Data

US Dollar – After a week of losses, the US dollar is finally bouncing. It remains to be seen whether this move is real however because the data was not the main catalyst, instead the price action and timing of the breakdown suggests that the market was just tired of shorting dollars. The 400 point verticalization of the Euro against the dollar and the 600 point move in the British pound over the past few days tempted many traders to take profits ahead of the Fed’s Beige Book report, which turned out to be neither dollar bullish nor dollar bearish. The various Fed districts echoed the same themes as Chairman Bernanke earlier this week. Their number one concern was the housing market and the fact that both sales and prices were falling. Even though consumer spending is picking up in the districts, they are cautiously optimistic about growth, which is no surprise given that the report was submitted on November 20th, a few days before Black Friday. In terms of inflation, they saw some moderation in prices for construction materials and energy products, but it is not enough to give the Fed a reason to move interest rates. The one piece of good news was their assessment of the labor market, which they felt still remained tight. The other pieces of economic data that was released this morning were also mixed. Even though third quarter GDP printed strongly at 2.2 percent, the core PCE, which is an inflation measure was revised down from 2.3 to 2.2 percent. New home sales dropped 3.2 percent in the month of October, but the report contained underlying strength as prices increased 1.9 percent. The housing market still remains very vulnerable and is far from stabilization. Therefore, the overall takeaway is that the market is comforted by the firmness of the GDP report, but the dollar is not out of the woods. Although a further recovery is likely, the major downtrend should still remain intact.

Euro and Swiss Franc - Comments on the Euro were the day’s main focus as the market listened for any type of concern from ECB officials about the level of the Euro. The French Finance Minster repeated that the EUR/USD above 1.30 requires vigilance, but no one has really paid attention to his words because they came from a politician rather than a monetary official. ECB President Trichet refused to comment on the level of the currency but he did say that excess volatility was unwelcome. This caused a very mild sell-off in the currency because the central bank President stopped short of calling the move brutal. Weber made a similar comment as Trichet while ECB members Stark and Noyer refrained from commenting on the currency. The ECB is delivering one collective message, which is a tactic they are known for. Perhaps they want to make sure that the market continues to fully price in their December hike, so that there isn’t a major spike come December 7th. Mean while there was only one piece of Eurozone economic data released today and that was French unemployment. After dropping by 50,000 in the month of September, unemployment increased by 5,000 in October, leaving the unemployment rate unchanged at 8.8 percent. There is a lot more data due for release tomorrow including German unemployment, French consumer confidence, French PPI and Eurozone GDP. Should the data come out weak, the sell-off in the Euro may not be as sedate as it was today. Over in Switzerland, the tiny country reported a much weaker KoF leading indicator report. The index fell to the lowest level since February 2006 which comes in contrast to the rise in the UBS Consumption Indicator that was reported yesterday. This contributed to the Swiss franc’s slide against both the Euro and US dollar. Consumer price numbers are due for release and if they come out weak, the franc could extend its losses.

British Pound – Unsurprisingly, housing market data printed strongly this morning with net consumer credit and mortgage approvals both rising. In fact, mortgage lending increased by the biggest amount in 3 years, illustrating the resilience of the housing market, which has been the primary driver of the economy. Money supply remained unchanged, suggesting that for the time being, inflationary pressures are not running away. More housing market data is due for release tomorrow but the market’s main focus should be on the Gfk consumer confidence report and the CBI distributive trades survey. Both are predicted to be strong and if that is really the case, it could help the GBP/USD find some sort of support.

Japanese Yen – Stronger Japanese data was reflected in the currency’s performance against the Euro, British pound and Canadian dollar, but the rebound in the US dollar was so dominant that it overpowered the gains in the yen. Industrial production increased by 1.6 percent in the month of October, which was quite a surprise considering that the market was expecting the index to fall by 0.4 percent. Vehicle production also increased by 12 percent, which we believe must be tied to the weakness in the Yen against the Euro. The value of the Yen is making it very inexpensive for Europeans to import Japanese made cars. Meanwhile we also heard some bullish comments from Japanese officials last night. Both the Bank of Japan Governor Fukui and Finance Minister Omi said that the economy is expanding moderately and they are optimistic about its economic outlook.

Commodity Currencies (CAD, AUD, NZD) - The commodity currencies were all weaker against the US dollar despite the rise in oil and gold prices. Australia had a horrid trade balance number reported last night as well as weaker construction work. New Zealand reported disappointing building permits and stronger money supply growth. Canada reported a drop in industrial and raw material prices, which indicates softer inflationary pressures and a rise in the current account balance. Australian retail sales are due for release tonight and the recent trend of data suggests that spending could slow. Canada is set to report GDP, which is predicted to be stronger.


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