• Reasons to be Dollar Bearish: Sub-Prime, Halliburton, Retail Sales
• Hawkish Liebscher Comments Sends Euro Higher
• Japanese Yen Erases Earlier Gains Despite Firmer GDP Data
US Dollar – Even though there was no US data released today, the market had plenty of reasons to be bearish the US dollar. First, shares of New Century Financial were suspended for trading this morning, raising concerns that the company may have no choice but to file for bankruptcy. The problem in the sub-prime lending sector is worsening and run the risk of impacting the housing market as a whole. Mortgage lenders are expected to tighten their lending rules, regardless of whether they lend to the sub-prime market or not. With housing inventory at a 3 month high, prices could soon be affected as well. In addition to New Century Financial, Halliburton also announced that it will be moving its corporate headquarters from Houston to Dubai. Their move is a no-win situation for the US economy and US dollar. Not only will it shave hundreds of millions of dollars from tax revenue, but the economic and political consequences of their move could bring out old concerns that many traders and investors may have already forgotten about – which include the twin deficits and protectionism. If Halliburton gets away with this and Congress fails to block them, more US companies may follow suit – which could hurt the labor market and take away even more tax revenue. Adding to the dollar bearish sentiment in the market are expectations for weaker US retail sales tomorrow. February was one of the coldest months on record and Wal-Mart has already missed its sales forecasts as a result. Retail sales should set the tone for the first part of the week until Thursday when we have producer prices, net foreign purchases of US Securities and the Philadelphia Fed index on the docket.
Euro – The Euro rebounded strongly today thanks to hawkish comments from ECB member Liebscher and overall dollar bearish sentiment. Liebscher reminded traders that the central bank's work is not over because he feels that inflation is still a risk. He even indicated that he would be willing to vote in favor of raising rates again at the expense of growth. After raising interest rates to 3.75 percent last Thursday, ECB President Trichet toned down his degree of hawkishness to signal a pause in April and potentially in May as well. However another rate hike in June is still possible depending upon how the Eurozone and global economy fares. The German ZEW survey of analyst sentiment is due for release tomorrow along with Eurozone industrial production. Analysts tend to be more pessimistic than companies which suggest that we could see a drop in analyst sentiment for the month of March. With the increase to the Value Added Tax finally having an impact on the economy and the ECB raising rates recently, the tighter business conditions is a good reason for analysts to pare back their expectations for growth. Given the weak Italian industrial production numbers, manufacturing activity in the region as a whole could deteriorate.
British Pound – The British pound strengthened against the US dollar but weakened against the Euro. Producer prices grew at a stronger than expected rate in the month of February, which suggests that consumer prices, due out next week could also reflect stronger inflationary pressures. In addition to PPI, house prices also grew by a faster rate in January. The housing market continues to stabilize and show strength which would provide a good backdrop for another rate by the Bank of England in the second half of the year. Looking ahead, we are expecting more house price reports from the Financial Times and the Royal Institute of Chartered Surveyors. The trade balance is also due for release. Lower oil prices in the month of February are expected to narrow the trade deficit. All of these pieces of data are important, but not as much as the labor market report due on Wednesday. Therefore expect the market to hold its breath for the US data and not the UK data tomorrow.
Japanese Yen – Shortly after the European market open, the Japanese Yen skyrocketed against all of the major currency pairs as dealers report the unwinding of more carry trades. Part of the move may have also been attributed to a delayed reaction to the stronger Japanese GDP data and Chinese trade surplus. A sharp revision to capital expenditures resulted in 5.5 percent GDP growth in the fourth quarter compared to an earlier estimate of 4.8 percent. Other data released this morning was not as encouraging however. The Capital Goods Price Index (CGPI) which is an inflationary measure remained flat in the month of February while the trade surplus narrowed from Y1.77 billion to Y1.19 billion. The Yen rally however was reversed when US traders came into the markets. The rally in the Dow could have helped to trigger the correction in the Japanese Yen. The Japanese Yen has been particularly volatile which means that even though there is no economic data due for release tonight, we could still see some decent volatility in the Japanese Yen. In fact, most of the big activity in the Japanese Yen happens during the Asian trading hours these days.
Commodity Currencies (CAD, AUD, NZD) – The Australian, New Zealand and Canadian dollars are all stronger today despite the fact that gold prices are flat and oil prices are lower. Canadian data has been extremely firm with productivity increasing 0.3 percent in the fourth quarter, which compares to the market's expectation for a 0.3 percent drop. Australian data was mixed. Home loans were weaker than expected but investment lending and the Manpower Employment survey were stronger. Data patterns in New Zealand was the same with food prices growing by a meager 0.1 percent in February while the Manpower Employment survey increased from 25 to 32 percent. Generally speaking, the labor market is tight in both Australia and New Zealand, spurring speculation that Australia could resurrect its monetary policy tightening later this year. There is no Canadian data tomorrow, but New Zealand is expected to report retail sales while Australia release its business confidence survey. Even though softer readings are expected for both, the tightness of the labor market and continually hawkish comments from RBNZ Governor Bollard still leaves scope for an upside surprise.