Highlights
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USD slumps further, Gold breaks $800/oz and oil hits $95/bbl |
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Fed signal on future rate cuts ignored as market looks ahead |
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ECB & BOE expected to hold rates steady; RBA to hike 1/4% |
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Fed Chair Bernanke updates Congress on Thursday |
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Commentary
Brian Dolan, Chief Currency Strategist
The USD slumped to new lows against all major currencies (apart from the JPY) as the Fed delivered on expectations of 1/4% rate cut at mid-week. The rate cut came with a statement that was roundly considered more hawkish than most had been expecting, but still the US dollar could find no support. Prior to the Fed's rate decision, 3Q advance GDP came in well above consensus forecasts at 3.9%, but the dollar stayed soft. The same effect was seen on Friday when Oct. NFP data showed an increase of 166K new jobs, nearly double consensus estimates, and the dollar declined to fresh lows. (See more on the NFP report below.) Bottom line--the USD continues to suffer from an overwhelmingly gloomy outlook on the direction of the US economy and interest rates, and there appears to be no light at the end of the tunnel.
(Actually, the NFP number was not the blazingly positive number the headline suggested. The household survey, as opposed to the NFP establishment survey which covers firms and government hiring, reported a net decline in employment and showed around 200K individuals left the workforce. The lower size of the labor force kept the unemployment rate steady, otherwise it would have risen. Finally, 103K of the 166K increase was based on assumptions of how many jobs new businesses created, not on any sampling of actual jobs created. Those assumptions are likely to be revised sharply lower when the Nov. NFP is released. For example, the NFP report assumed job gains of 14K in construction and 25K in financial services, but both of those are contracting, suggesting a negative revision there of between -39K and -59K alone, assuming those sectors actually shed jobs.)
In contrast to the plight of the USD, other major currencies continued to draw support from positive economic outlooks and hawkish interest rate outlooks. GBP led the charge higher against the USD as 3 BOE MPC members offered hawkish remarks that effectively squelched nascent speculation the BOE would cut rates this year. ECB speakers, led by Bundesbank Pres. Weber, continued to bang the drum of higher rates in the future, and inflation readings gave them all the ammo they needed to make that case. Canadian officials appear to be at a loss to corral the CAD, which is now trading at nineteenth century levels (yes, I mean the 1800's), as oil and commodity prices continue to soar.
Regular readers of this report should recall that I had expected emerging US economic weakness to eventually cycle over and undermine the outlook for the global economy and other major economies, especially the UK, preventing an outright collapse in the USD. I still hold to that outlook, but it has become painfully evident that it's going to take much longer than I anticipated, most likely now in 1Q 2008 at the earliest. In the meantime, there appears to be very little on the fundamental horizon to stem the USD decline, which keeps the USD a sell on any rally. Apart from concerted intervention by G7 central banks (which appears highly unlikely given the lack of US Treasury concern over the USD decline), about the only element able to reverse the buck's descent is market positioning, but even that is usually just a temporary reprieve Despite relatively high levels of USD-short positioning, we are not at extremes just yet. This was evident throughout this past week as heavy USD-selling materialized on the brief data/Fed-inspired USD bounces. EUR/USD has for the moment stalled just below the all-time equivalent low in USD/DEM, which comes in at 1.4536 EUR/USD. Look for a sustained break of that level to trigger further gains to 1.4700-50 rising daily channel top.
The fly in the ointment for global financial markets remains uncertainty surrounding financial sector losses stemming from the sub-prime/mortgage-backed securities. Equity markets were battered as fears swelled up again that major losses were still not being revealed. To date, US banks have borne the brunt of the fallout, but the focus could shift in coming weeks to other nation's banks and equity markets, with a number of major French and Australian banks set to report 3Q earnings next week. Currency traders can use equity market sell-offs, which have recently been very closely correlated with JPY-crosses, such as EUR/JPY, GBP/JPY, and AUD/JPY, as opportunities to buy the non-JPY dollar pair.
Next week will see several key interest rate-setting meetings in the UK, Eurozone, and Australia, with only the RBA expected to hike rates by 1/4%. The BOE is likely to remain on hold from now until early 2008, when an anticipated slowdown, led by housing and financial services, is expected to see the BOE begin to lower rates. The ECB is chomping at the bit to raise rates, but in the current environment of tight credit market conditions, not to mention the soaring EUR, their hands are effectively tied. However, expect Trichet to continue sounding hawkish and warning of higher rates in the future. The RBA is expected to raise rates a 1/4% in light of strong data recently, which leaves the risk that they hold steady due to credit market concerns and the high value of the AUD. Lower than expected 3Q CPI data could provide the cover for holding the line on rates. Whether they hike or not, I'd expect to see some profit-taking selling of long AUD positions as the next rate hike is likely to be the last for some time.
Turning to US data and events next week, Oct. ISM non-manufacturing is out on Monday. Tuesday has only weekly ABC consumer confidence. Wednesday sees weekly mortgage applications, 3Q productivity and unit labor costs, and Sept. wholesale inventories. Thursday sees weekly jobless claims and Oct. ICSC chain store sales. Friday see the Sept. trade deficit, Oct. import prices and preliminary Nov. Univ. of Michigan consumer sentiment. Fed speakers are highlighted by Fed Chair Bernanke speaking to the congressional Joint Economic Committee on Thursday. Multiple other Fed speakers are on tap, but the only one addressing the economic/rate outlook is Atlanta's Lockhart on Wednesday.
Eurozone data sees the Nov. Sentix investor confidence gauge on Monday. Tuesday sees Oct PMI services surveys, Sept. Eurozone PPI, Sept. Eurozone retail sales, and Sept. German factory orders. Wednesday sees only German Sept. industrial production. Thursday is ECB rate decision day, after the release of Sept. German trade data. Friday concludes with Oct. German wholesale prices, French and Italian Sept. industrial production, and Sept. OECD leading economic indicators.
Japanese data begins with the release of the Sept. BOJ meeting on Monday morning in Tokyo. Tuesday afternoon sees preliminary Sept. leading economic index. Thursday morning sees Sept. machine orders, weekly stock and bond flows, Oct. money supply and bank lending data, followed by preliminary-Oct. machine tool orders and the Oct. economy watchers survey in the afternoon. Friday sees final Sept. industrial production and capacity utilization.
UK data will see the Oct PMI services survey on Monday along with Sept. industrial/manufacturing production reports. Tuesday sees the Oct. NIESR GDP estimate and the BRC retail sales monitor. Wednesday has only the BRC Oct. shop price index, a private measure of retail inflation. Thursday will see the expected steady BOE rate decision announced, followed by the Sept. leading indicator index in the afternoon. Friday sees UK trade balance reports for Sept.
In Canada, Tuesday brings us the Canadian IVEY Purchasing Managers index which is a measure of the month on month change in dollar terms of purchases of purchasing managers in Canada. Tuesday also brings a speech by the Bank of Canada's Dep. Gov. Jenkins. The topic will be 'North America in Today's Global Economic Setting.' Thursday sees Oct. housing starts. Friday brings the International Merchandise Trade data which could indicate how much the strengthening CAD is affecting exports and imports.
Australia has two significant events this week. On Tuesday we get the Royal Bank of Australia's Cash Target announcement. The market fully expects interest rates to be raised at this meeting to 6.75% from 6.5%. On Thursday we get Australian Employment Data for October. This will be the first major piece of data the RBA will get to look at after they have made their decision on interest rates earlier in the week.
New Zealand is mostly quiet except for two key events this week. We start the week with Finance Minster Cullen speaking on the economy on Monday. Wednesday brings us the Employment data for the third quarter. This release will be a good gauge of the economy and future direction of interest rates for that country.
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