With U.S. yields stabilizing, it is not surprising to see the dollar trade higher against some but not all of the major currencies. Having been sold aggressively over the past few weeks, the greenback rebounded against the British pound, Swiss Franc, Australian and New Zealand dollars. It ended the NY session unchanged against the euro and continued to sell-off against the Japanese Yen and Canadian dollar. The conflicting price action is a sign that today's move in the dollar may amount to nothing more than a relief rally. The EUR/USD and AUD/USD have tacked on significant gains in a very short period of time and corrections such as the ones that we have seen today are in line with general market activity. In fact, it is rare to see a currency pair move in one direction for an extended period of time without any retracements.
Good Data Not Enough to Prospect of More QE
This morning's U.S. economic reports were stronger than expected, but the impact on the dollar was limited because regardless of how good or bad today's data was, it will not change the market's belief that the Fed will ease in November. The data only suggests that the Fed could ease by a smaller degree, but any stimulus, large or small still makes the Fed one of the most dovish central banks in the developed world. The improvements in economic data were modest. Chicago manufacturing activity accelerated in the month of September with the PMI index rising from 56.7 to 60.4. Unfortunately the report was not entirely positive as an increase in production, new orders and inventories was met with a decrease in prices paid, order backlogs, employment and supplier deliveries. The recovery in manufacturing has been very uneven with the Philadelphia and Chicago regions reporting stronger activity while the NY, Richmond and Dallas regions reported a slowdown. Jobless claims dropped from an upwardly revised 469k to 453k in the week ending Sept 25th. Continuing claims also fell from 4.54M to 4.457M. Second quarter GDP was revised up from 1.6 to 1.7 percent thanks to an increase in personal consumption. Although the labor market is getting a little better and consumer consumption has increased, these numbers hardly reflect a strong recovery. Personal income, personal spending, the final University of Michigan consumer sentiment numbers, manufacturing ISM and construction spending are scheduled for release tomorrow which means that it should be another busy trading day.
EUR: GERMAN UNEMPLOYMENT RATE HITS 18 YR LOW
The euro rose to a 5 month high against the U.S. dollar following stronger than expected economic data. The number of people filing for unemployment benefits in Germany fell by 40k in the month of September, pushing the unemployment rate down to 7.5 percent, the lowest level in 18 years. The fact that the German unemployment rate reached this milestone is big reason why the EUR/USD continues to rise. In contrast, the U.S. unemployment rate increased in the month of September from 9.5 to 9.6 percent and based upon the current forecasts, it is expected to be even higher. Many Fed officials believe that the U.S. unemployment rate will stay above 8 percent well into 2012. Companies in Germany on the other hand are benefitting significantly from Chinese demand. Daimler and Volkswagen for example are adding jobs to fulfill increasing orders from Asia and Latin America. This improvement in the labor market explains why German Chancellor Merkel was so optimistic earlier this week. Inflationary pressures have also increased slightly in the Eurozone with the German consumer price estimate rising from 1.6 to 1.8 percent for September. A total of 225 billion euros in loans to the ECB were due for repayment today and based upon the smaller demand for six day ECB funds, fewer banks are relying on the central bank for financing. However not all news was good news - rating agency Moody's reduced Spain's sovereign debt rating from Aaa to Aa1 with a stable outlook. Normally rating downgrades are very bearish for a currency but considering that Moody's has simply been catching up with other rating agencies who previously downgraded Spain's rating, the announcement was not all that groundbreaking. As for the bailout of Anglo Irish Bank - the cost was staggering but the market was relieved that there is finally some transparency. The bad news is that bond holders may have to share in the cost, which means that they may not receive their full payments. Tomorrow will be another busy day for the euro with German retail sales and manufacturing PMI figures due for release. Switzerland will also be reporting its retail sales figures and manufacturing PMI data.
GBP: SMALL UPTICK IN HOUSE PRICES
The British pound continued to sell off against the U.S. dollar and euro as the British Chambers of Commerce joined the Bank of England's Posen in supporting easier monetary policy. The BCC's Chief Economist Kern said this morning that the main risks for the U.K. is a Japan like stagnation or a double dip recession. He said Posen is right to advocate for more stimulus and he believes the BoE may increase their asset purchase program by GBP25 billion as early as November. Given the amount of dissent within the Monetary Policy Committee, we do not believe that the BoE will be able to agree on a new policy. Even Posen is not entirely committed to voting for more stimulus. Although his call for additional easing earlier this week halted the pound's rally, he said today that the Monetary Policy Committee "may even talk him out of case for more QE." Yet that has not stopped the pound from falling because the fact that central bank officials are even considering additional stimulus is enough for investors to take profits on long sterling positions at current levels. Meanwhile U.K. economic data was better than expected with house prices rising by 0.1 percent in September according to Nationwide. House prices have finally rebounded after falling for 2 straight months, but the uptick is very small and therefore indicates that the housing market remains weak. Manufacturing sector PMI is scheduled for release tomorrow and economists are anticipating another weak print.
CAD: GDP CONTRACTS FOR FIRST TIME IN 11 MONTHS
The Canadian dollar ended the NY trading session slightly stronger than the greenback while the Australian and New Zealand dollars ended lower. The Canadian economy contracted by 0.1 percent in the month of July after growing by 0.2 percent in June. This was the first time that GDP fell in 11 months, as a larger trade deficit and weak consumer spending weighs on growth. After raising interest rates on September 8 th , softer growth should now keep the Bank of Canada on hold for the rest of the year. However Finance Minister Flaherty is not that pessimistic. In comments made this morning, he said he expects positive GDP growth this quarter and a balanced budget by 2014-2015. Bank of Canada Governor Carney on the other hand expects growth to resume, albeit at a modest pace. Although the Australian dollar retreated against the greenback, it still managed to hit a fresh 2 year high before pulling back. Aussie traders ignored the weaker housing market numbers which showed building approvals falling by 4.7 percent in August and private sector credit growing by only 0.1 percent. This was due in part to the relatively positive tone of the Reserve Bank's report on Financial Stability. The central bank believes that the banking system remains strong and show signs of returning to pre-crisis levels. They also felt that the broader economy appeared healthier with growth returning to trend. Although historically high levels of house hold debt makes Australians sensitive to rate and income shocks, their finances remain sound. Australian manufacturing PMI numbers are scheduled for release this evening and the outcome of the report will determine whether or not the Aussie will able to resume its gains in the near term. Meanwhile New Zealand reported slightly weaker economic data with building permits falling by 17.8 percent in August and business confidence deteriorating. The one piece of good news was the NBNZ activity outlook index, which edged slightly higher.
JPY: BOJ ONLY INTERVENED ONCE
The weakness in equities pushed the Japanese Yen higher against most of the major currencies. Despite USD/JPY falling to a low of 83.13 during the Asian trading session, we have not heard a peep from Japanese officials. This is very interesting because leading up to their intervention on September 15 th , Japanese officials were very vocal in expressing their discontent with the strength of the Yen when it was trading at current levels before their intervention and now there is only radio silence. With U.S. policymakers focused on punishing China for currency manipulation, the Japanese may be trying to avoid similar scrutiny by the U.S. government. According to the Ministry of Finance, the Bank of Japan sold Y2.12 trillion during their intervention in September, which was less than half the amount of Yen that they sold in March 2004. This suggests t they only intervened once and that the jump in USD/JPY on Friday was not related to official flow. Economic data was mixed with manufacturing activity contracting in the month of September. Retail sales also grew less than expected (although twice the amount of the previous month), while industrial production fell 0.3 percent in August. Construction orders were flat while housing starts increased. It will be another busy night in Japan with the jobless rate, household spending and consumer prices scheduled for release.
GBP/USD: Currency in Play for Next 24 Hours
The GBP/USD will be the currency pair in play tomorrow with U.K manufacturing PMI scheduled for release at 4:30AM ET / 8:30 GMT. The U.S. will follow with personal income and spending at 8:30AM ET / 12:30 GMT and manufacturing ISM at 10:00AM ET / 14:00 GMT.
The recent pullback in the GBP/USD has caused the currency pair to move into the Range Trading Zone, which we determined using Bollinger Bands. A double top is forming in the GBP/USD, which suggests that further losses are likely. Although the correction has caused the near term uptrend to be broken, we really need to see the GBP/USD fall below 1.5580 before steeper losses can be seen. The reason is because this support level coincides with the 20 and 50-day SMA and the 23.6% Fibonacci retracement of the May to August rally. Should the GBP/USD resume its rise, resistance will be at today's high of 1.5923.
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