New Zealand Dollar Skyrockets on Japanese Demand, Traders Remains Very Dollar Bearish, The Significance of an Eight Day Move in the British Pound
US Dollar - Mostly weaker US economic data pushed the US dollar to fresh yearly highs against the Euro and British pound. Durable goods orders dropped by a whopping 8.3 percent in the month of October while the ex transportation component fell by 1.7 percent. To the surprise of most traders, despite strong spending this holiday weekend, consumer confidence fell from 105.4 to 102.9 in the month of November.
However these reports were not the main triggers for the dollar's drop today. Instead, it was Bernanke's downbeat outlook on the housing market that sent the dollar tumbling after noontime in the US. The market is so bearish dollars that they completely shrugged off Bernanke's strong stance on inflation, as well as Plosser's hint that more rate hikes may be needed. Even Poole and Fisher, who spoke earlier in the day felt that given the current inflation levels, it is better to keep interest rates high than to lower them.
With oil prices still holding steady, their latest inflation fears must be driven by the move in the US dollar. We have already mentioned the inflationary effects of the falling dollar and that is exactly what Fed officials have honed in on as well. Unless we see some surprisingly strong prints in US data, it is dangerous to fade the dollar's recent move, given its momentum. GDP is predicted to come out stronger tomorrow, despite Bernanke's comments on softer growth. Unless we see a big jump, it should do little to stop the dollar's slide.
Instead, the afternoon Beige Book report will the release to watch. If Fed districts paint a more positive assessment and outlook on growth, it may cause a bounce in the currency. Not all news was bad today with existing home sales rising for the first time since February and the Richmond Fed manufacturing index rising from -2 to 7.
Euro and Swiss Franc - Once again, the Euro has shrugged off softer economic data. The three month average of Eurozone M3 money supply growth saw a smaller rise in the month of October while the annualized pace of growth in the French housing market fell from 4.1 percent to 3.9 percent. With the Euro trading at 1.32, the concern of policy officials still remain minimal. In fact, the Austrian Finance Minister even said that the strength of the Euro reflects the strength of the Eurozone economy. If the Euro manages to extend its rally up to 1.34, we would be surprised not to hear any central bank officials reiterating their plans for reserve diversification.
The comment from the Deputy Governor of the People's Bank of China today is a perfect reflection of how other central bankers will soon feel. He said that holders of US dollars should become increasingly worried about their positions as they face the prospects of falling long term rates and a declining US dollar. The erosion of the US dollar's value will wake many central bankers up as they weigh return on yield versus an erosion of the face value of their investments. With only the French unemployment data due for release, there is little standing in the way of further gains in the Euro.
Meanwhile over in Switzerland, the UBS Consumption Indicator increased from 1.828 to 1.96 in the month of October. The downward revision to the September data offset some the bullishness from the report, but the data does suggest that the KoF leading indicator could hold steady tomorrow.
British Pound - The British pound continued to rally for the eighth consecutive trading day. The last time we saw a move of this duration was in late July, early August and the move ended right after the eighth trading day. The same was true back in December 2005. The down move also bottomed on the ninth trading day.
There have been instances where the move extended until the ninth trading day, but we do not see that as often. Either way, the odds for a retracement in the British pound on Wednesday or Thursday is very high. Merger and acquisition news continues to be the primary driver of sterling strength as Spain's Iberdrola confirmed plans to buy Scottish Power. The OECD revised down there UK GDP forecast for 2007 from 2.9 percent to 2.6 percent and revised up their inflation forecasts. The news has had little impact on the British pound, which rose against both the Euro and US dollar. Housing market and money supply reports are due for release tomorrow. They are expected to confirm the strength in the housing market, which could keep the currency bid before the US data releases.
Japanese Yen - The Japanese Yen sold off across the board today after a disappointing retail sales report. This is the second straight month that sales fell even though gasoline prices in Japan increased. The Japanese government has had a very tough time boosting domestic demand and their data reflects it. In probably his most frank comments in recent weeks, Bank of Japan Governor Fukui said that the central bank will be keeping rates low for a very long time. This is the main reason why the US dollar has not fallen much against the Yen, because it is still very costly to be short USD/JPY with US interest rates at 5.25 percent and Japanese rates at 0.25 percent.
Commodity Currencies (CAD, AUD, NZD) - The New Zealand dollar is the day's biggest mover. The currency has increased 100 pips against the US dollar on little news other than speculation that Japanese buyers are snapping up New Zealand dollars in order to participate in the launch of a Daiwa fund. In the late afternoon, New Zealand released building permits which fell 1.9 percent in the month of October after having increased 6.1 percent the prior month.
Both the Canadian and Australian dollars are also stronger despite the RBA's forecast for a drop in headline inflation in 2006. We finally get to see Canadian data tomorrow as the calendar picks up. The current account and industrial price index are expected to be released. With USD/CAD showing signs of a potential bottom, weak Canadian data and stronger US data could cement the bottom.