Will the US Consumer Hold Up the US Dollar? (page 1 of 2)

DailyFX Fundamentals 10-11-07

By Kathy Lien, Chief Strategist of DailyFX.com



200 Point Reversal in the Dow Suggest Follow Through for Carry Trades

The US stock market reversed 200 points in a matter of minutes, triggering a ripple effect in the currency market. Having been up as much as 100 points intraday, currency pairs like GBP/JPY, CHF/JPY, AUD/JPY and EUR/JPY sold off quickly and sharply. The moves in USD/JPY were comparatively mild, but even that currency pair ended the US trading session near its lows. The chance for follow through selling in the Asia and Europe suggest that carry trades could see further losses. However whether a major top is in place remains to be seen since every correction in the Dow over the past month has been met by a new record high in the days to follow. There was no major reason for the reversal, except for the fact that 14,200 proved to be a level too difficult to breach, but a multitude of factors have been blamed. JPMorgan Chase announced that they were cutting staff while the company also lowered their sales estimate for China's version of Google, Baidu.com, causing massive selling in tech stocks. Around the same time, ECB member Weber warned that the central may need to act given the current level of inflation. This raised the fear that interest rate hikes are still on the table for many central banks around the world. Japan itself will not be joining the party. Last night, they voted 8 to 1 to keep interest rates unchanged at 50bp. Mizuno voted in favor of a rate hike for the fourth month in a row. Economic data out of Japan was weak with machine orders, the current account surplus and money supply all deteriorating, but still, Moody's upgraded Japan's debt rating to A1 from Aaa. We still think that the economy is in trouble with deflation a bigger problem than inflation even though this will have no bearing on how the Yen trades (only equity prices will for the time being). Tonight, we have consumer confidence and domestic CGPI, which is an inflation measure; both are expected to be firmer.

Will the US Consumer Hold Up the US Dollar?

The most anticipated US economic data scheduled for this week will be released tomorrow, which are retail sales and producer prices for the month of September. The acceleration of import prices suggest a similar rise in producer prices while retail sales growth is expected to be tepid after a number of small retailers cut their sales forecasts this morning. However the market's low forecast for retail sales suggest that it won't take much to surprise to the upside which is possible given that Wal-Mart raised its sales forecasts. Earlier in the day, the US dollar was helped by the improvement in the US trade deficit as the weak dollar drove exports to a record high. In addition to retail sales and PPI we are also expecting business inventories and consumer confidence. Given that non-farm payrolls in August and September were not that bad, if consumer spending holds steady, then the Fed has absolutely no reason to lower interest rates at the end of this month. The market is currently pricing in one interest rate cut by the end of the year with the greater chance that it will happen in December over October. Tomorrow's numbers will seal the fate of when interest rates will be cut again.

Euro Tackles 1.42 as ECB Grows More Hawkish

The Euro continued to rise today thanks to stronger inflation data, hawkish comments from ECB officials and buying interest related to the RBS and ABN Amro deal.