FXView

US$ Strengthens as Risk Appetite Wanes

The Dollar gained against all of its major counterparts, except the Japanese yen, as investors scaled back demands for higher yielding currencies.  With U.S. equity markets pointed to a lower open, the dollar could find continued support as risk sentiment wanes.  However, this week’s economic calendar will likely set the tone for the greenback in the near term.  Many economists expect the economic data to reinforce an improved outlook for the U.S. economy beginning with the release of Chicago PMI this morning, which is expected to rise for the third consecutive month.   Tuesday sees the release of both ISM Manufacturing Index and Pending Home sales number.  Wednesday investors will shift their focus to the Federal Reserve minutes from the August meeting for further signs of a time frame for when the FED will reduce its quantitative easing program and eventually raise interest rates.  Thursday’s Jobless claims and ISM manufacturing numbers are expected to register minor improvements.  Friday, the US unemployment rate is expected to climb to 9.5 percent, up from a reading of 9.4% percent in the month prior.  An improved economic outlook could weigh on the dollar throughout the week as the greenback continues its correlation to the prevailing risk sentiment. 

 

The Euro fell overnight despite strong economic data released in the Euro-zone, as investors shunned higher yielding currencies as global stocks declined.  Euro CPI showed the European consumer prices dropped less than economists forecasts as the economy pulls out of the deepest recession since WWII.  This data should buoy the common currency, as price stability is key to economic recovery.  Later this week, the European Central Bank will meet and it is widely expected that they will keep their benchmark interest rate at 1.0%.  However, commentary following the rate decision will likely steer the direction of the Euro, as investors will try to anticipate when the central bank will raise interest rates.

 

The Japanese yen rose sharply against it major trading partners aided by lower global equities and the results of Sunday’s national election.  The new and untested Democratic Party of Japan won an overwhelming majority in the Japanese election, ending the 50-year dominance of the Liberal Democratic Party.   Voters rejected the party that has largely run their nation since WWII as the Japanese economy continues to struggle.  Also aiding the yen, was a global pull pack in risk assumption.  Both European and Asian stocks traded lower overnight over fears that the recent gain in equity markets has out paced global growth.  With US stocks also expected to open lower, the yen may to continue trade near the highs of its recent ranges. 

 

Monday is the Summer Bank holiday in the United Kingdom.  However, the British pound remains under pressure as lower European and Asian stocks put pressure on the higher yielding currency.  The pound may continue to trend lower as investors have scaled back their expectations of higher interests rates in the U.K., after the Bank of England increased its quantitative easing by an additional 50 billion pounds. 

US$ Continues to Weaken on Increased Global Optimism

The U.S. dollar extended yesterday’s losses overnight against most of its major counterparts, while gaining against the yen.  A strong U.S. GDP revision, improved continuing jobless claims and light trading sent the dollar near its worst levels of the year against the Euro as investors fled the dollar in favor of riskier currencies.  Equity markets remain supported in Asian and European trading and with U.S. futures pointing toward a higher open we could see dollar weakness continue.  Consumer spending rose 0.2 percent in July, in line with expectations, as Americans took advantage of the ‘cash for clunkers’ program.   Personal income was unchanged for the month.  This data has not had an immediate impact on the market, as traders will now look to the release of the University of Michigan Confidence reading at 10. a.m.  Improved consumer confidence could feed optimism and put further pressure on the dollar.   

 

The Euro continued to gain against the U.S. dollar during European trading as investors feed their appetite for risk.  Higher European equities combined with strong economic data continue to push the common currency higher.  Euro-Zone economic confidence rose to 80.6 from 76.0. Strong growth in the second quarter from the region’s largest economies, Germany and France, has raised hopes that they could lift the region out of its current recession. A slight gain in consumer confidence to -22 from -23 was a positive reading, but it slightly missed estimates of –21.  This shows Europeans may remain shell shocked from the credit crisis and will continue to curb spending until they see stronger evidence of a recovery.  With light trading expected today, the Euro will likely trade with U.S. equity markets, gaining if the US stocks continue their bullish sentiment. 

 

The Japanese yen fell against all it major counterparts overnight as global stocks advanced on evidence the global recession is slowing.  Strong GDP data out of the UK and higher economic confidence in Europe led investors to shun the yen in favor of higher yielding currencies.   Also weighing on the yen is an ever worsening economic outlook for Japan.  The Japanese unemployment rate rose to a record 5.7 percent in July.  This may be a final blow to the long ruling Liberal Democratic Party, which is expected to lose power in Sunday’s national election.  The yen continues to be tightly correlated to the prevailing risk sentiment, so expect the currency to continue to be under pressure if U.S. equities gain today. 

 

The British pound retraced much of its recent losses after data showed that Britain’s economy contracted less than expected in the second quarter.  The GDP reading was revised higher to -0.7 from -0.8% as private consumption and government spending were stronger than initially estimated.  However, the numbers have also raised concerns as U.K. exports declined from -1.6% to -2.7%.  While this is a significant improvement from the first quarter, the lack of demand from abroad may continue to depress labor markets and consumer sentiment.  Indeed, U.K. consumer confidence held steady at –25, missing estimates of -24. This could raise concerns that consumers may be reluctant to return to their normal spending habits if they remained worried over future growth.

 

 

 

US$ Mostly Unchanged After Strong GDP Release

The U.S. dollar traded in mixed ranges overnight, trading flat against the EUR, gaining against the Pound and losing against the Japanese yen.  The dollar gained yesterday despite better than expected Durable goods orders and New Home sales.  This was a possible sign that the dollar may start trading in line with economic fundamentals, rather than risk sentiment.  Today’s GDP report and jobless claims number may shed some light on the dollar’s current relationship to risk.  The GDP report was expected to show a revision of a  –1.5% percent contraction on the U.S. economy.  However, the number beat expectations showing a contraction of only –1.0 percent, a sign the U.S. economy may be able to pull out of the recession in the current quarter.  Initial jobless claims missed economist projections showing a loss of 570K jobs, versus an expectation of 565K.  However, fewer Americans filed claims than the week prior, signaling the worst of the recession may be behind us.  Continuing jobless claims beat expectations falling to the lowest level since April.  The dollar was largely unchanged after the release of the data, therefore expect the dollar to take its cue from U.S. equity markets throughout today’s trading session.

 

The Euro was able to hold it’s ground against the dollar on the heels of mixed economic data released in the Euro-zone.  Consumer sentiment in Italy registered at its highest level since December 2006 while Germans saw their outlook improve the most in 15 months.  However, Euro-Zone retail PMI was released weaker than expected, a sign that consumers continue to tighten their wallets.  The August reading fell to 47.1 from 47.3 the month prior as the sector remained in contraction for a 15th straight month.  This data supports recent rhetoric from the European Central Bank that growth will be difficult to obtain once public spending dissipates, if consumer consumption does not improve.

 

The Japanese yen gained versus all of its major counterparts as concerns over Chinese production helped fuel the demand for the safe-haven currency.  China, the world’s fastest growing major economy, announced plans to curb its production of steel and cement adding to concerns that a global economic recovery may be hampered.  Also boosting the yen was a decline in both Asian and European equity markets.  Despite economic fundamentals in Japan remaining weak, expect the yen to continue in its role as a proxy for risk.

 

The British pound continued its recent decline against the dollar, despite positive housing data released in the U.K.  A Nationwide LLC report showed that home prices rose the most since 2006.  The average cost of a home climbed 1.6 percent, which surpassed forecasts of a 0.5% gain.  The improvement in the housing sector has been a source of hope for the U.K. economy but concerns remain that small businesses are finding it difficult to garner the necessary credit to invest in opportunities. Indeed, the quarterly total business investment report showed a 10.4% decline in the second quarter which was well below estimates of a 3.6% drop.  Poor economic fundamentals could continue to put pressure on the pound, as while sterling trades at its lowest level since June.

 

US$ Gains Slightly on Waning Risk

The U.S. dollar strengthened overnight to its best level of the week as investors become concerned with the scope of a global recovery.  The dollar continues to trade in correlation to risk, rising on poor economic data and lower equities.  However, the dollar was able to inch higher yesterday following a better than expected consumer confidence reading, a possible sign that greenback is beginning to trade on fundamentals. Today will give us a clearer view of the direction of the dollar as both Durable goods orders and new home sales are expected to have shown improvement in July.  The purchase of long lasting items rose 4.9 percent versus a forecast of a 3.0% increase.  This follows an unexpected drop of 2.5% the month prior.  The dollar has gained slightly on the back of this number. Meanwhile, purchases of newly constructed homes are expected to continue to improve by 1.6% adding to the 11.0% gain in June.  Despite yesterday’s reaction to Consumer confidence the broader theme of risk aversion may continue to drive bullish dollar sentiment throughout the day as U.S. equities are expected to open lower.

 

The EUR fell against the U.S. dollar overnight despite strong economic data released in the Euro-zone.  The German IFO business sentiment reading rose for a fifth straight month to 90.5 from 87.3, beating forecasts of 89.0.  The sentiment reading is a strong leading indicator for GDP and the consistent improvement provides hope that the 0.3% growth in the second quarter in Germany is sustainable.  Despite the positive numbers, there is a prevailing concern that consumers will not readily return to their prior spending habits and that banks will be reluctant to lend.  Also, the Bank of Tokyo released a research note stating that the Euro’s failure to rise significantly against the dollar after Germany and France saw growth in the second quarter is a sign there is “limited upside scope for the Euro” in the near future.  Therefore expect the Euro to continue to take its cue from global equities and U.S. economic data that is slated for the rest of the week. 

 

The Japanese yen continued to be firm overnight as global demand for risk waned slightly.  However, economic fundamentals in Japan continue to worsen.  Japan’s exports fell for a tenth straight month in July as demand for Japanese goods deteriorated.  Japan’s finance ministry reported that shipments abroad tumbled 36.5 percent from a year earlier as a plunge in demand for cars and electronics hurt the Japanese economy.  While the yen still enjoys its roll as a proxy for risk, weak economic fundamentals will likely weigh on the currency in the long term. 

 

The British pound continues to remain under pressure as downside risks to economic growth in the U.K. persist.  The Bank of England has been aggressive in its actions, as it has continued to add to its asset purchase program.  Members of the BoE are concerned that banks trying to rebuild their balance sheets will hoard cash and continue to tighten lending standards.  Therefore expect the pound to be heavy the rest of the week against its major counterparts. 

 

 

US$ Under Pressure Before Data

The US$ remained firm in overnight trading as a pull back in risk appetite caused Asian and European stocks to sell off.  However, the dollar has come under pressure in early trading as U.S. equity futures have crept back into positive territory. Therefore, we could see a reversal in sentiment, especially if the slew of U.S. data due to cross the wires supports a brighter outlook.  The S&P Case Shiller home price index is forecasted to show that the pace of decline in home prices is continuing to slow. The stabilization of the housing sector is key to a U.S. recovery and could spur demand for risk.  10 a.m. sees the release of Consumer confidence, which economists are predicting will rise to 47.9 from 46.6. Although, it is an improvement it is still far from May’s reading of 54.80 signaling that there remains a great deal of concern over a potential recovery.  Also weighing on the dollar was the announcement that President Obama will seek to reappoint Fed Chief Bernake to a second term, which has provided stability to equity markets.  With light summer trading, expect the dollar to trade with risk sentiment, falling if investors seek riskier assets.

 

The Euro was under slight pressure overnight following bearish comments from European Central Bank member Mersch. The single currency initially fell sharply on the policy maker’s remarks that the current recovery is not sustainable because it is dependant on public funds.  This offset the bullish sentiment derived from the final German GDP figures, which confirmed an expansion of 0.3% in the second quarter for the Euro-zone’s largest economy.  The Euro has found support from positive U.S. equity futures.  Positive data in the U.S. could also sent the common currency higher against the U.S. dollar. 

 

The Japanese yen gained overnight, benefiting from its safe-haven status as Asian equity markets sold off. The Shanghai Composite Index fell by 2.6 percent and the Japanese Nikkei fell almost 1 percent following remarks from Chinese Premier Wen Jaibao that monetary policy will stay loose because the Chinese economy faces new difficulties.  However, the yen has given back some of its recent gains as U.S. equity futures are pointed to a higher open. 

 

The British pound was able to retrace most of its losses overnight after strong housing data was released in the U.K.  The BBA measurement of home loans rose to 38,181 from 35,235 as the housing markets continues to make improvements.  This marked the highest level in mortgage approvals since February of 2009. However, concerns still remain that loans to consumers and small businesses remain difficult to attain which could threaten a U.K. recovery.  The pound continues to be linked to risk appetite and if U.S. equity markets look to trade higher then the pound will likely follow suit.

 

 

US$ Trading in Flat Ranges Ahead of Data Releases

The U.S. dollar is largely unchanged from Friday against the Euro and the British pound, while positive U.S. equity futures caused the dollar to strengthen against the Japanese yen.  However, the dollar continues to lose ground against commodity currencies, such as the Australian and New Zealand dollars, as oil prices hold above $73 a barrel.    With a light economic calendar today, expect the dollar to continue to trade with risk appetite, weakening if equity markets continue their bullish sentiment.  This week sees the release of data that will likely steer risk sentiment as traders look for consistent signs of economic recovery.  Consumer Confidence is slated for release on Tuesday and Durable Good orders and New Home sales will cross the wires on Wednesday morning.  National GDP and Jobless Claims will likely move markets on Thursday, while Personal Income and Consumer Sentiment will round out the week on Friday.  Better than expected data will likely continue to put pressure on the reserve currency, while signs of weakness could send the dollar higher.

 

The Euro remained firm over the weekend after positive economic data was released in Europe overnight, reinforcing an improved outlook for the Euro-zone.  A report by the European Union’s statistics office showed industrial demands jumped 3.1% in June to mark the biggest rise in 19 months amid expectations for a 1.8% rise.  This data suggests the economic downturn is nearing a bottom as ECB policymakers took unprecedented steps to stem the downside risks for growth and inflation.  Meanwhile, ECB President Trichet held an improved outlook for the economy at the Federal Reserve summit at Jackson Hole, Wyoming over the weekend.  However, he did say that he sees a “very bumpy road ahead” as Euro-zone unemployment is likely to reach 9.4%. 

 

The Japanese yen fell slightly against its major counterparts as demand for the safety of the Japanese currency declined in favor of higher-yielding investments.  Improving economic data and central bank comments that the global recession is easing also weighed on the yen.  Federal Reserve Chairman Bernake said over the weekend that chances for near-term growth in the US “appear good”, while ECB President Trichet confirmed that the European economy “is starting to get out of the period of free fall.”  The yen continues to be tightly correlated to the prevailing risk sentiment, so expect global equities and economic data to steer the direction of the safe-haven currency. 

 

The British pound also remained firm against the dollar, but will likely hold to its recent narrow ranges as investors weigh the outlook for the global economy. The expansion of quantitative easing by the Bank of England may continue to drag on the pound, as investors scale back expectations for a rate hike next year.  However, as loans for home purchases are anticipated to rise for the fourth consecutive month in July and expectations for an economic recovery later this year, the Sterling could trade higher into September.

US$ Lower on Strong European Economic Data

The US dollar fell overnight after strong manufacturing and service data released in Europe weakened the argument that the United States will be the first to emerge from the recession.  European stocks and U.S equity futures are slightly positive, adding pressure to the greenback.  10 a.m. sees the release of Existing home sales.  An expected gain to 5.0 million from 4.89 million could add to dollar weakness if it fuels risk appetite.  Later today, Fed Chief Ben Bernake will speak at a conference in Jackson Hole, WY.  If he presents a brighter outlook for the U.S. economy it could provide dollar support as it may raise interest rate expectations. However, it is not expected that the central bank leader will talk specifically about interest rate policy, which could limit the impact of his remarks.  Therefore, expect the dollar to trade with the prevailing risk sentiment, remaining weak if stocks stay positive and existing home sales beat expectations. 

 

The Euro spiked overnight after the release of much better than expected economic data.  German PMI figures showed the region’s largest economy experienced growth in its service sector. The PMI reading jumped to 54.1 from 48.1, which obliterated forecasts of 48.6. This was complimented by French manufacturing PMI, which also showing expansion. German manufacturing and French services also advanced which helped raise the composite Euro-Zone PMI to 50.0 as the region is on the brink of expansion. The strength in both sectors validates the growth that France and Germany saw in the second quarter and provided evidence that it may be sustainable.  Higher global equities are also proving support for the common currency.

 

The Japanese yen continues to trade near its highs of recent ranges, despite a slight rise in European equity and US stock futures.  The yen found support as Chinese regulators are considering new rules that would tighten capital requirements for banks.  It is believed that these measures would slow the rate at which banks could lend funds, and could hinder growth within China.  China has long been considered as a linchpin for global recovery, therefore the expectation of slower growth has led investors to seek the safety of the Japanese yen. 

 

The Pound gained against the dollar, as increasing optimism has led traders to purchase higher yielding currencies such as the pound and Euro.  An empty U.K. economic calendar has caused the pound to trade almost solely with risk sentiment, gaining as global equities and economic data have registered positive.   Expect the pound to trade in tight, but choppy ranges as a light volume trading day could lead traders to take profit on long pound positions. 

US$ Unchanged After Jobless Claims

The US dollar traded in flat ranges overnight, staying near the lower end of the recent ranges, as risk appetite remains firm.  More Americans unexpectedly filed first time jobless benefits last week, with a reading of 576K versus and expectation of 550K, indicating that companies are continuing to cut costs even as the economy stabilizes. Continuing claims also exceeded expectations rising from last week’s reading.  However, these numbers have done little to change the direction of the dollar in early trading.  Later this morning shows the release of the Philadelphia Fed and Leading Indicators.  The Philadelphia Fed is forecasted to rise to -2 from -7.5. A positive reading would continue the trend of strong manufacturing performances across the country, which has been an area that equity bulls point toward in their argument for a stronger recovery. A positive reading from the leading indicators for a fourth straight month will also add to the improving outlook.

 

The Euro was little changed overnight as it consolidated from yesterday’s gains.  There was no economic data released in the Euro-zone to change the current sentiment. However, we did see positive data released out of Switzerland, which showed signs the region’s economy is stabilizing as the Euro-zone is Switzerland’s main trading partner.  Swiss exports rose for the first time in three months by 4.1%, a sign that European demand is rising. Additionally, the Swiss Zew investor sentiment survey jumped to 18.6 from 0, which was the highest since July of 2006.  With little data out of Europe, look for the Euro to trade with risk sentiment during the U.S. trading session.

 

The Japanese yen remained strong overnight despite a rebound in Asian equity markets, as Chinese shares stormed higher.  Weaker than expected jobless claims in the United States has helped keep the yen near its highest levels in month versus the US dollar and the Euro.  The strength of the Japanese currency remains tightly correlated to risk, so look to U.S. equity markets to move the yen. 

 

The British Pound gave back some of yesterday’s gains following a report that showed U.K. government debt increased by 8 billion pounds.  It was the worst reading ever for the month of July, which is a time when the government receives tax revenues from companies.  This has raised fears that future taxation will limit growth in the U.K.  Limiting these bearish sentiments were better than expected July retails sales that showed a gain of 0.4%.  Sales of household goods rose 4.5% adding to signs of growth for the economy.  The Sterling continues to find support against the U.S. dollar, as risk appetite appears to remain firm as global equity markets rebounded.

US$ Continues to Trade With Equity Markets

The US dollar is mixed this morning, trading flat against the EUR, gaining significantly against the pound and losing against the Japanese yen.  With U.S. equities pointed to a lower open, the greenback continues to be influenced by risk sentiment despite brief bouts of fundamental influence, which may continue to be the case until there are signs that a recovery is clearly underway.  Today’s economic calendar has done little to change the risk sentiment as only MBA mortgage applications were released.  Therefore, expect the dollar to trade in lock step with stock markets, gaining against higher yielding currencies, such as the Euro and Pound, if equities remain under pressure.  The end of the week sees the release of a slew of data that could change sentiment.  Jobless claims, the Philadelphia Fed and Leading indicators are all slated for release tomorrow.  Existing Home Sales will round out the week on Friday expecting to show an increase of 2.0% down from a gain of 3.6% from the prior reading. 

 

The Euro traded slightly lower over night as a pull back in risk appetite and poor economic data weighed on the common currency.  German producer prices declined by 7.8% versus expectations of -6.5% which was the largest fall in sixty years. The sharp drop in oil prices from a year ago continues to filter through the economy and continued disinflation in the region should limit interest rate expectations from the European Central Bank. The Euro-zone current account showed the deficit shrunk to -0.3 billion from -11.9 billion as the region saw an increase in the outflow of goods. However, on a seasonal adjusted basis the shortfall rose to -5.3 billion as demand for European exports remains weak.

 

The Japanese yen strengthened across the board as global equity markets have come under renewed pressure, causing investors to seek the safety of the low-yielding currency. China’s benchmark stock index fell into a bear market, re-igniting speculation that the global economic recovery is stalling.   Expect the yen to benefit from its roll as a proxy for risk, especially if U.S. equities continue to trade lower throughout the day. 

 

The Pound fell considerably overnight following the release of the Bank of England minutes, which revealed that the committee wasn’t unanimous on the amount to be added to their asset purchase program.  The BoE Monetary Policy committee voted 6-3 for the additional 50 billion pounds with Governor Mervyn King and two others looking to add 75 billion.  The revelation that the central bank considered additional efforts beyond the already surprising 50 billion pounds negated the bullish sentiment generated by yesterday’s inflation report’s surprising flat reading.  These bearish minutes increased speculation the central bank will keep the key interest rate at an all time low.  Also weighing on the pound were slumping Asian equities and a US stock futures expected to open lower, causing investors to shun the pound in favor of safer currencies such as the US dollar and Japanese yen. 

US$ Holds Yesterday's Gains Depsite Good Data Out of Europe

The US dollar held on to most of its recent gains despite an up tick in investor’s appetite for risk overnight.  U.S. equity markets are pointed to a higher open this morning, after falling over two percent during yesterday’s trading.  However, weaker than expected data released this morning could buoy the dollar as risk aversion may persist.  Wholesale prices in the US fell more than forecast in July, capping the largest 12-month drop on record and showing inflation will not be an immediate concern in the U.S.  A lack of inflation pressures is one reason the Fed reiterated last week that they plan on keeping interest rates near zero for an ‘extended period.”  Also, housing starts in the US unexpectedly fell in July with a reading of 581K versus an expected gain of 599K.  As the dollar continues its tight correlation to risk and with no further data slated for release today, expect the dollar to take its cue from equity markets throughout today’s trading.

 

The Euro is slightly stronger this morning after strong economic data was released in the region.  The German ZEW survey showed that investor confidence climbed with a reading of 56.1 from 39.5.  This shattered expectations of a 45.0 reading, bringing German confidence to the highest level in more than three years after government stimulus and rising exports pulled Europe’s largest economy out of recession.  Despite renewed optimism in the Euro-zone, high unemployment threatens to hinder the European recovery.  Unemployment in Germany is at its highest levels since 2007 and there is a risk that their recovery will falter when the stimulus programs expire, which could ultimately weigh on the common currency.

 

The Japanese yen fell slightly overnight, retreating from its monthly highs against the dollar yesterday.  While Asian equity markets traded in choppy ranges, a rise in European stocks and U.S. equity futures put the safe-haven currency under pressure.  Strong German investor confidence and inflationary data released in the U.K. caused investors to slightly shun the yen in favor of riskier assets. The yen continues to be a proxy for risk, so expect the currency to be under pressure if U.S. equity markets can regain some of yesterday’s loses.

 

The Pound regained some of its recent loses against the dollar after the Office for National Statistics reported the U.K. inflation rate unexpectedly held at 1.8 percent versus an expected decline to 1.5 percent.  Rising costs for housing, automobiles and alcohol helped propel this gain in inflation. The threat of rising inflation could raise interest rate expectations providing support for the pound.    However, last week the Bank of England warned that we could expect volatility in the inflation numbers and furthermore that  they expect inflation will remain below their 2% target for the rest of the year. If the central bank viewed rising prices as a threat then they might have reconsidered the £50 billion that they recently added to their asset purchase program.  Overall, this pledge of additional liquidity to the market should continue to weigh on the pound in the short term.