The price action in the currency market over the past 24 hours suggests that foreign exchange traders may have already gone into holiday mode. Intraday trading ranges are beginning to shrink and the performance of the dollar was mixed against the key currencies. For example, the dollar traded higher against the British pound and commodity currencies (AUD, NZD, CAD) but fell against the euro, Japanese Yen and Swiss Franc. Although U.S. equities ended the NY trading session in negative territory, it was off its lows. With the holiday looming in the U.S., forex traders are hesitant about taking the dollar to a fresh year to date low against the euro and Japanese Yen. However the fact that the EUR/USD remains above 1.49 and USD/JPY is trading at a one month low suggests that we could see further losses in the U.S. dollar.
Federal Reserve Expects a Jobless Recovery
According to the minutes of the November 4th monetary policy meeting, Fed officials have grown increasingly aware of the risks associated with low interest rates and a weak dollar. Some of the FOMC members noted the possibility of negative side effects that might result from very low interest rates such as excessive risk taking in financial markets or an unanchoring of inflation expectations. Although the likelihood of this happening is “relatively low,” they are telling the markets that they will keep an eye on these risks. As for the dollar, so far the Fed believes that the decline is orderly but they are growing wary of the falling dollar’s impact on inflation. In other words, low rates and a weak dollar are not immediate threats, but the Fed is closely watching the effects of these two dynamics on the economy. The risks to growth are roughly balanced with financial market trends supporting the recovery but capital spending is likely to be subdued. Commercial real estate poses a downside risk to their forecast of a stronger economy over the next 2 years. The central bank also released their latest economic forecasts. As indicated by the table below, the Fed revised their growth and inflation forecast upwards and revised their unemployment forecast downward. Unfortunately, the central bank expects unemployment to remain “quiet elevated” throughout the recovery which means that they do not expect to return to the 4 to 5 percent unemployment rates that we enjoyed between 2007 and 2008 within the next 2 years. In other words, the Fed expects a jobless recovery.
U.S. Economic Data Indicative of Uneven Recovery
The latest economic reports confirm the uneven recovery in the U.S. economy. Third quarter GDP was revised from 3.5 to 2.8 percent in the third quarter. Personal consumption took the biggest hit with growth revised to 2.9 percent from 3.4 percent. According to S&P/Case-Shiller, house prices rose for the fifth consecutive month. The house price index stabilized which can still be considered positive. However the Richmond Fed index took a big tumble which suggests that the recovery in the manufacturing sector may be slowing. Consumer confidence edged higher but the Conference Board’s report is at odds with prior sentiment surveys. With the U.S. markets closed on Thursday, Wednesday will be a particularly data heavy day. Personal income, spending, durable goods, PCE, jobless claims, new home sales and the final University of Michigan Consumer Sentiment survey are due for release. Overall, we believe that the odds are skewed towards stronger reports given the rise in retail sales in October and the improvement in the manufacturing ISM survey earlier this month.
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