Is the New Zealand Dollar Bottoming? (page 1 of 2)

DailyFX Fundamentals 09-10-07

US Dollar: Nervous Market Leads to Nervous Price Action

The price action in the financial markets indicates that traders are nervous. Last Friday's non-farm payrolls number was horrid, paving the way for a minimum of 25 basis points of easing on September 18.

At this time, the market has even priced in a greater than 50 percent chance of a half point cut and the probability that the Fed will lower interest rates by 75bp is now greater than the probability that they will leave rates unchanged.

Yet, Fed officials continued to do what they know best, which is attempt to pacify the market's fears. Atlanta Fed President Lockhart indicated that even though the labor market is weakening, consumer spending remains strong while Dallas Fed Fisher said the US economy is weather the storm thus far.

Surprisingly, there is still a minority that believes the Fed will not cut interest rates, which may be part of the reason why the stock market and carry trades have been so volatile today. An article by Reuters is arguing that the Fed may forgo cutting the Fed Funds rate completely and cut the discount rate instead. We think that this is unlikely, but at the same time, this could also be the driver behind today's wild swings in the Dow.

The index was down as much as 75 points intraday before reversing up 75 points and then giving back those gains to end positive by only 14 points. Although the central bank is still optimistic, many other agencies are not.

The National Association of Business Economics and the Blue Chip Economic Indicators newsletter are both seeing an increased chance of a recession. These people help companies plan their spending in the months to come which is extremely important for the economic outlook.

Although the trade balance will be released tomorrow, the big US release this week is retail sales on Friday. As long as there are no blowouts in the trade number, we could see a bit more recovery in the US dollar before Friday. The overall trend however is still bearish and we do not expect last Friday's losses to be recovered.

Ben Bernanke is scheduled to speak tomorrow but don't expect any particularly market moving comments from the Fed Chairman. His topic is Global Imbalances: Recent Developments and Prospects. He will be reading from prepared text and there will be no question and answer session.

Euro: Still Aiming for its All Time Highs

Stronger French economic data and growing concerns about the US economy is helping the Euro rally for the fourth trading day in a row.

The currency pair is now within 50 pips of its all time high and barring any unforeseen circumstances, that level is too close for traders not to a test.

French industrial production jumped 1.3 per cent in July, signaling a recovery in GDP growth in the third quarter. In an environment where the outlook for US growth is worsening, the upside surprise to European data is shining a bright light on the ECB's still hawkish monetary policy.

We do not believe the ECB will raise rates again this year, but they still left the door open for that possibility which at bare minimum tells us that they are not considering lowering interest rates.

A number of ECB officials will be speaking tomorrow including Trichet. The ECB has not decided on what they will be doing with interest rates over the next few months and we expect the comments tomorrow to reflect that.