Euro: Beginning to See Weaker Economic Data

DailyFX Fundamentals 09-24-07

By Kathy Lien, Chief Strategist of DailyFX.com

Dollar Gets No Help from Policymakers

After records were broken last week, trading in the currency market has been quiet. There were no US economic data released and the four Federal Reserve officials scheduled to speak stuck mostly to their scripted remarks at various conferences around the country.

Fed Chairman Ben Bernanke learned early in this term the consequences of being overly loose lipped which is why he spoke about nothing other than education and economic competitiveness in Washington today.

Dallas Federal Reserve President Richard Fisher did indicate that the recent trend of inflation gives the Fed wiggle room which suggests that they could ease monetary policy further. The stock market is lower but the US dollar is mixed.

Weakness continued against most currency pairs with the exception of the euro, Swiss franc and Canadian dollar whose moves have become extremely overextended.

Although commodity prices are softer today, they remain at very high levels. We haven't talked much about inflation because the risk to US growth outweighed the risks to price stability. However the falling US dollar and rising oil prices will lead to strong inflationary pressures in September and October.

As a result, we expect the 50bp interest rate cuts that are currently priced into the markets to be spread out between the October and December FOMC meetings. Tomorrow we have the S&P Case-Shiller index of home prices, consumer confidence and existing home sales reports due for release.

You can see these numbers as soon as they are released on the DailyFX Calendar. All of the data are expected to be weak since they represent the most vulnerable part of the US economy.

Therefore the surprise element will come in the form of stronger and not weaker data. The US dollar could still bounce this week off of manufacturing data on Wednesday, but the overall trend is still down and the comment from Fisher today reinforces that.

Euro: Beginning to See Weaker Economic Data

We have indicated that one of the factors that could potentially trigger a top in the euro is weaker economic data. On Friday, we already had service sector PMI disappoint and today, Eurozone industrial orders fell by a more than expected four per cent. This was the biggest drop in new orders in 18 months and illustrates the difficulties that the manufacturing sector is facing at the moment and a strong euro will only make things worse for the export dependent nation.

Papers across Europe have headlines screaming about the potential damage that the skyrocketing currency will do to the region's economy. It will take more than PMI and industrial orders however to make a top in the euro meaningful.

Tomorrow we have the German IFO report. A big drop in business confidence has the significance to take the currency pair back below 1.40 but the surprise may not be big enough since the Belgian manufacturing survey only fell modestly.

Meanwhile Switzerland will also be releasing its UBS consumption index. Swiss economic data has recently been surprising to the downside, which explains why EUR/CHF is trading at the top of its month long range.

British Pound Sees Big Intraday Reversal

There was a big intraday reversal in the British pound today. After hitting a high of 2.0321, the pound trended lower and hasn't looked back. There was no major UK economic to trigger the move.

Instead, the rally was attributed to a large merger or acquisition flow. The business friendly policies have made the UK and the British pound big beneficiaries of cross border acquisitions.

Just last week, the London Stock Exchange sold a 48 per cent interest to the Qatar Investment Authority and Borse Dubai. UK public finances were the only piece of data released today and apparently net debt and net cash requirement hit a record high in August.

This indicates that the government has had a tough time raising cash and financing. The only piece of UK data due out tomorrow is second quarter total business investment; don't expect it to be particularly market moving.

Carry Trades Pare Back Gains

Carry trades are having a tough time extending their past week's gains. Although we rarely bring technicals into this report, it is important to note that the majority of the Japanese yen crosses have failed right at their 100-day simple moving averages.

Today, the Dow also turned around lunchtime exacerbating the pressure on the yen crosses. The minutes from the Bank of Japan's monetary policy meeting last month will be released tonight along with the corporate service price index.

We do not expect any major surprises there. If anything, the minutes should reveal a central bank that is still hawkish even though they do not have the flexibility to alter interest rates.

Japan also welcomes a new Prime Minister Yasuo Fukuda. He has been chosen to be the new President of the LDP, is the son of a former Prime Minister and is a seasoned politician.

Canadian Dollar Stabilises Near Parity

The Canadian dollar's rise to parity against the US dollar was one of the biggest stories in the financial markets last week. With no economic data due until Friday, the Canadian dollar is expected to stabilise for most of this week.

Bank of Canada Governor David Dodge is scheduled to speak tomorrow. Given the recent strength of the Canadian dollar, the odds are favouring more dovish comments from the central banker. The economy has been stable enough for the BoC to not need to lower interest rates, but any cautionary comments could still be taking negatively by the markets.

The Australian and New Zealand dollars continued to advance after the RBA Financial Stability Review found that households and the banking sector face little financial difficulties.