Dollar Falls on the Prospect that Rising Oil Prices Could Hurt Holiday Spending, British Pound Continues to Rise on Strong Data and More Merger News, Yen Rises Against High Carry Currencies
US Dollar – Even though the holiday shopping season is at the top of everybody's minds, the market could not ignore the fact that oil prices have creeped back above $60 a barrel. Bad weather in Alaska has forced the Trans-Alaska Pipeline System to reduce their shipping volumes by 35 percent while Marathon Oil was forced to shut one of their platforms in the North Sea after a gas leak.
Since having remained below $60 for all of last week, the pop higher in crude prices at a time when the weather is turning colder in the Northeast is reminding traders of how far prices have fallen over the past few months. The fear is that if oil continues to climb, it could deal a blow to the liberal spending that is expected of consumers this holiday season. This will continue to be the market's main focus with Black Friday and Cyber Monday right around the corner.
Even though the Redbook retail sales report showed a smaller rise in same store sales over the past week, the ICSC-UBS chain store sales index jumped 1.2 percent. These are leading indicators of what may be to come on Friday, but we will not have to wait long to get a true sense of how holiday shopping will fare this Christmas season as everyone heads to the stores later this week.
Federal Reserve officials continue to be persistently hawkish with Governor Warsh reiterating that inflation remains "uncomfortably elevated." The minutes from Fed meetings held in October indicate that this sentiment is quite unanimous although core inflation is not high enough to warrant a rate hike. The one takeaway point from the Fed is that they will not be adjusting rates anytime soon. Trading should grind to a halt after noontime tomorrow as US traders leave early for the Thanksgiving Holiday.
Euro and Swiss Franc – The Euro reversed yesterday's losses after the release of the Fed minutes. Although nothing groundbreaking was revealed in the minutes, traders seemed to be comforted by the fact that inflation is not high enough for the Fed to consider lifting interest rates. Meanwhile economic data from the Eurozone continued to weaken, which raises the possibility that the ECB could seriously tame down their outlook for monetary policy after the widely anticipated December rate hike.
French GDP was flat in the third quarter, which brought the annualized pace of growth down from 2.6 percent to 1.8 percent. The French economy has been weak and that is expected to be reflected in the country's consumer spending data tomorrow. Italian data was also disappointing with industrial orders falling more than expected and the trade deficit climbing in the month of September. Things were very different over in Switzerland. Both the trade surplus and the producer prices were stronger than expected as the weakness of the Swiss Franc played a major role in boosting exports. The stronger data helped the Swiss franc rally against both the US dollar and Euro.
British Pound – The British pound extended its strength for the third straight day after firmer CBI numbers this morning. Originally expected to improve from -20 to -15, the index printed at -6 for the month of November thanks to a sharp rise in export orders. In fact, despite overall sterling strength, export orders still managed to hit an 11 year high. In addition to the recent trend of stronger data, merger and acquisition news is also supporting the pound.
Even though the London Stock Exchange rejected Nasdaq's bid, the offer highlighted the fervent demand for UK companies. Today, there were rumors that Spain's Iberdrola would be making a GBP12 billion bid for Scottish Power. The free market principles of the UK are fueling aggressive merger activity that otherwise would have gone to US who has suffered under the Sarbanes Oxley Act. The Bank of England is set to release the minutes from their latest monetary policy meeting tomorrow. The minutes are expected to reflect their tamer outlook on inflation and bullish outlook on growth.
Japanese Yen – The Japanese Yen is stronger today against the high carry currencies after Bank of Japan's Muto said that the timing of the next rate hike is "completely open," which includes the possibility of a rate move in December. Unlike the Japanese government, who were not supportive of tighter monetary policy or worried about carry trades, Muto said that he, which mostly likely means the central bank as a whole, is indeed watching carry trades.
Meanwhile the minutes from the central bank revealed nothing more than their continued plans to raise rates gradually. The problem however is the same one that we have been having for months now which is that Japanese government will do what they can to stop the central bank from moving forward. Just as Muto delivered hawkish comments, Japan's Economics Minister Ota said that he wanted to see the BoJ support continued economic growth through monetary policy which is basically an elegant way of saying that he wants to see rates remain low so that it could boost economic activity.
Commodity Currencies (CAD, AUD, NZD) – Commodity currencies are all stronger today as oil prices rise and gold prices remain firm. The move in oil prices and the rise in stocks, which hit a new record high, completely offset the sharp drop in retail sales and the smaller rise in leading indicators. Even though consumer spending fell in the month of September, the drop was primarily attributed to weaker auto sales.
Outside of the auto sector, sales actually increased. In fact, the main source of growth in the leading indicator report for the month of October was consumer spending. Canada is expected to release consumer prices tomorrow while the markets are expecting the weekly crude inventory data. With the Canadian dollar beginning to show signs of a bottom, strength in either of those reports could fuel more meaningful gains for the currency.
As for the Australian and New Zealand dollars, only minor data was released. Australian new motor vehicle sales increased 2.9 percent in October after a 3.0 percent rise the prior month. The annualized pace of New Zealand credit card spending slowed from 9.2 to 8.9 percent, suggesting that retail sales could have been a tad softer in the month of October.