Eurozone Consumers Continue to Spend (page 1 of 2)

DailyFX Fundamentals 03-21-08

By Kathy Lien, Chief Strategist of DailyFX.com


What to Expect for the US Dollar

Markets around the globe were closed for Good Friday which led to zero volatility in currencies. After a week of wild swings, the quiet trading gives everyone an opportunity to think about what could impact the US dollar in the week ahead. Banks have not been shy about tapping into the Fed's new liquidity provisions and the recent move in the stock market suggests that the central bank's efforts have helped to temporarily ease the latest uncertainty in the financial markets. The demise of Bear Stearns could have led to a huge collapse in the stock market, but actions by the Fed have helped stocks end the week higher than its pre-Bear Stearns levels. The biggest problem in the financial markets right now is the fear of counterparty risk. By allowing investment banks to post a broader range of collateral for a longer period of time, the Federal Reserve has in effect, swapped their safe Treasury bonds for dodgier assets such as mortgage backed securities. Unfortunately this will only be a temporary solution to a serious problem which is why we haven't seen the end of dollar weakness. Two weeks from now, we have non-farm payrolls due for release and the vulnerability of the labor market will come back to the forefront. Goldman Sachs just joined Citigroup in announcing a new round of layoffs. However before those numbers are released, we do have a week of only Tier 2 US economic data, or data that should not be particularly market moving. The most important releases are existing and new home sales, durable goods, consumer confidence, the final Q4 GDP numbers, personal income and personal spending. Everyone expects the housing market to remain weak, but consumer confidence could surprise to the upside since the weekly ABC numbers have shown signs of stability. The GDP numbers are the final figures for the fourth quarter, which means that they should not be particularly market moving. Therefore even though the US dollar could resume its slide relatively soon, the lack of any Tier 1 economic data such as non-farm payrolls, inflation reports or retail sales does not ensure that this will happen in the coming week. In the meantime, keep an eye on the equity and bond markets. If they continue to stabilize, the dollar could extend its rebound, but if volatility grapples the market once again, the dollar could quickly resume its slide.

Eurozone Consumers Continue to Spend

In contrast to the US, Eurozone economic data continues to surprise to the upside. Last month's German retail sales report was strong and now we see that same strength extended to France and Italy. Consumers are spending which is helping to make the ECB's job a much easier one than the Fed. No European bank is at the brink of collapse and for the time being, the economy remains stable. Next week, we have the German IFO report. Once again, analysts expect business confidence to deteriorate but the odds are definitely in favor of a stronger release. The flash estimates of manufacturing and service sector PMI both surprised to the upside which suggests that business for German corporations remained strong last month. Aside from the IFO, we are also expecting Eurozone Current Account numbers and retail PMI. The Swiss franc on the other hand has had a relatively good week with the liquidation in carry trades. The UBS Consumption and the KoF leading indicator reports are due for release next week.