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By Kathy Lien, Chief Strategist of DailyFX.com
US Dollar: Has risk appetite returned?
Today's rebound in the financial markets has everyone hoping that we have hit a bottom. Stocks, carry trades and bond yields are all up sharply, but given the strong selling that we saw last week, a recovery is hardly surprising.
There was no US economic data released today but stronger earnings from Tyson Foods and Verizon helped to draw back some optimism. Even the VIX (Exchange Volatility Index), the measure of volatility in the stock market, has retraced, but this does not mean that risk appetite has returned.
The new record high in the Shanghai stock index suggests that even though global investors are nervous, they are not nervous enough to dump their Asian exposure. Although it may be tempting to hope that August should bring us a calmer market, it is not time to become complacent. Another major announcement of losses could easily send the Dow and high yielding currency pairs tumbling once again.
The market has shrugged off news that American Home Mortgage, which commands 2.5 per cent of the mortgage market, has to delay its quarterly dividend because of major write-downs. AHM specialises in prime and near prime loans, which means that bad loans are extending beyond subprime lenders.
Tomorrow we will get a better look at how consumers are bearing the pain. Personal income and personal spending are due for release along with the PCE deflator, Chicago PMI and consumer confidence. A sharp drop in confidence as well as a widening gap between spending and income will resurrect talk of an end of the year interest rate cut.
Bloomberg Fedwatcher John Berry claims that it will take more than a few days of market volatility to change the Fed's stance, but there is a great deal of economic data this week could affect the Fed's bias. This includes manufacturing ISM, service sector ISM and non-farm payrolls.
Euro rebounds on dollar weakness, shrugging off softer economic data
The euro rebounded today despite weaker economic data. Both French producer prices and retail PMI for July deteriorated, providing further evidence that the strength of the euro is finally weighing on the economy.
That does not seem to matter however as speculators talk about the possibility of a surprise press conference by the European Central Bank(ECB) this week. It is expected to leave interest rates unchanged, but if the market is pricing in a good chance of a September rate hike.
If the ECB plans on delivering one then, it will have to find an opportunity to reintroduce the words "strong vigilance". Now that the EUR/USD is close to 200 pips off its highs, the economy may be able to handle another rate hike. However we still think that a surprise press conference is unlikely given the recent comments by ECB officials.
Last week, ECB member Jürgen Stark said the strong euro was hurting exporters while Guy Quaden indicated that the central bank was against abrupt and excessive currency moves. Looking ahead we are expecting German retail sales, unemployment and Eurozone confidence. Switzerland on the other hand will be reporting its UBS consumption index which is barometer of consumer spending.
British pound unchanged despite stronger mortgage data
The British pound is unchanged for the day despite stronger housing market and mortgage approvals data.
Kathy Lien, Chief Strategist, Daily FX
