Dollar drops across the board as risk appetite picks up from where NY left off, shrugging the sell-off in Japanese shares. GBP is the amid the least gainers against USD after the minutes of the BoE revealed a 3-way split, with 7 members voting for a QE rise of $25 bln, one member voted for no raise (Dale) and one member voted for an increase of 40 bln. GBPUSD may not succeed in breaking the $1.6880s, while EURGBP faces a 1-week trend line resistance at 0.8910, with stochastics illustrating a possible 0.8930. GBPJPY enters a tight consolidation zone, which could signal a significant breakout. stochastics biased to downside. USDCAD expected to hold above 1.0460 support ahead of CAN Oct CPI (12:00 GMT) exp 1.7% y/y from 1.5%, core CPI exp 0.0% from 0.3%. CAD is propped by oils constant probing of the $80 level. CAD EIA inventory data will also be key for CAD. US CPI and housing permits/starts due at 13:30.
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Cable in very tight range and is respecting both levels. 9;30 news should give direction. 16700 is a key level to stay above on weekly. Spot FX GBP_USD (18-NOV-09).pngRead more…
The resilience of the British pound is surprising many traders. Of all the major currencies, the pound dropped the least against the dollar. In fact, it ended the U.S. trading session virtually unchanged. The currency’s strength can also be seen in EUR/GBP, which fell to a 2 month low. The strength of the sterling is due in part to the stronger than expected inflation numbers. Consumer prices rose 0.2 percent in October, driving the annualized pace of CPI growth up to 1.5 percent from 1.1 percent; core CPI rose from 1.7 to 1.8 percent. Inflation is a big focus of the central bank and the evidence of stronger inflationary pressures on both a core and headline basis could reduce the odds of further Quantitative Easing by the Bank of England. QE will be the main focus tomorrow with the minutes from this month’s monetary policy meeting due for release. Earlier this month, the BoE increased their QE program by GBP 25 billion, which was 50 percent less than the market had anticipated. Traders will be looking at the minutes for clues on why the BoE made the smaller move and how many members voted in favor of a 25B vs. 50B increase in the QE program. Yesterday, BoE member Sentance gave us a taste of how the central bank may feel. Based upon his comment that the next major QE decision will be in February, we believe that the central bank hasn’t made up their mind yet. Incoming economic data including this morning’s inflation numbers argue against additional easing and if the minutes reveal similar hesitancy by the BoE, the pound could extend its gains. The price action in the GBP/USD certainly suggests that traders are already positioning for a less dovish outcome.
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Over the past 24 hours, the U.S. dollar gained strength against all of the major currencies. However the rally, particularly against the British pound and Canadian dollar has been far from impressive. The GBP/USD is virtually unchanged while other currencies such as the euro and Australian dollars are off their lows. There is no question that central bank officials are trying to talk up the dollar and to some degree it is working because investors are starting to think that the dollar is not a one way trade. Yet just because the central banks want to see a stronger dollar does not mean that they will do anything to engineer one, particularly the Fed. Incoming economic data indicates that the pace of recovery is slowing which validates Bernanke’s concern that future setbacks are possible. Unless the recovery gains traction, the Fed may not want to take steps to derail it.
How Much Impact Can the Fed Have on the Dollar?
This morning, ECB President Trichet joined the chorus of central bank officials talking up the dollar and unlike the Fed, a stronger greenback is really in the interest of the Eurozone. However with the current level of inflation, growth and export demand, the euro is not a major threat unless it rises towards 1.60. We believe that Bernanke’s comment about the dollar is important, particularly after Fed President Lacker repeated this morning that the central bank is paying close attention to the value of the dollar. This is not a coincidence and not an off the cuff comment because Fed officials rarely talk about the dollar. At the same time, every single Fed official has also expressed caution about the outlook for the U.S. economy which makes it difficult for the Fed to even consider tightening monetary policy. Even though we are long term dollar bears, we caution traders against underestimating the power of currency related comments from Bernanke. The last time the Fed Chairman surprised the market with a comment on currencies was back in June and as you can see in the following chart, the EUR/USD fell 4 percent over the next 2 weeks. However after a month of consolidation, the uptrend resumed. Interestingly enough, a 4 percent drop in the EUR/USD would take the currency to 1.44, the former breakout zone. Whether Bernanke's comments have the power to engineer such a move again remains in question.
Will the Recovery in Housing Also Slow?
Tomorrow we will learn whether or not the pace of recovery in the housing market has also slowed. Housing starts and building permits are due for release Wednesday morning and unfortunately the disappointment in the NAHB housing market index points to weaker housing market activity. Along with the manufacturing sector, housing was one the first to recover. However the latest industrial production figures and yesterday’s Empire State manufacturing survey indicate that the growth is beginning to slow. Producer price pressure remains muted and because of that, consumer price growth could also be tepid. CPI numbers are due for release on Wednesday and any upside surprise should only come from gas prices which rose approximately 20 cents in the month of October.
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ECB President threw a wrench into the EUR/USD rally when he joined the chorus of central bankers supporting a strong dollar. Unlike the U.S. who really needs a weaker dollar, the Eurozone will really benefit from a stronger one. So far, ECB President Trichet has been comfortable with the strong euro because it has not affected trade materially and instead helps to reduce inflationary pressures. This morning's trade numbers from the Eurozone indicated that the deficit turned into a surplus thanks to the strongest rise in exports in 20 months. If the strong currency was really having a detrimental effect on the export sector, we would not have seen a 5.5 percent increase in foreign demand. Imports also rose by 1.1 percent which suggests that domestic demand is steady as well.
Although Trichet has a vested interest in seeing the dollar rise, he is not immediately concerned about the decline. This morning, the ECB head said he "notes with interest" Bernanke's comments on the dollar and believe its a "very important statement" because "a strong dollar is in the world's interest." According to Trichet, the "euro was not created to become a reserve currency" and to replace the dollar. On monetary policy, interest rates are still appropriate, but Trichet said unconventional steps will be phased out "progressively." The central bank is gearing up for an exit and the closer they get, the more demand there will be for euros instead of dollars.
Yesterday, we said traders should consider Bernanke's comments as verbal intervention in the dollar and the fact that Trichet says those comments were "very important" as well confirms that central bank officials want to talk up the dollar. However talk will only get the Fed so far - verbal intervention with no major threat of physical intervention or rate hikes carries little weight.
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When the market rallies it is generally on the back of a falling dollar. Remember it is not proportionate, however, it is reactionary. Therefore, regardless if the dollar is negative or positive on the day the market will catch a bid if the dollar declines regardless of where it is trading at the time.
Many times we can see two leading stocks or ETF's telling a different story. Therefore, one may be trading higher and the other could be trading negative. How do we know which one is talking to us. While it is not easy to differentiate between the two just watch the major indexes. When the major indexes react with the leading stock or ETF then that is the leader. In the example below we have XOM, and the OIH(oil services holders trust ETF). Clearly XOM is the stronger and more important of the two. XOM is one of the biggest market cap stocks and seems to move the market. Many would have suspected the OIH would be more important because it has many stocks in it's basket. However, XOM is clearly the bigger market mover. Remember it is important to find the stocks that move markets in order to know when the indexes are going to bounce or decline.
Tomorrows minutes from the Bank of Englands November MPC meeting will make the case for the decision to raise QE by only 25 bln rather than 50 bln. Part of the reason to go with 25 bln has been a short term rise in inflation, before ultimately retreating below target. MORE IMPORTANTLY, watch for the breakdown of the MPC vote. If the decision was unanimous (9-0) then sterling could push higher on the rationale that all members wanted a more conservative increase in QE. If the number of dissenters (asking for 50 bln) was as many as 3 or 4, then GBP could be dragged lower, especially if stocks are under pressure at the time. Also, bear in mind the risk that the dissenters would have opted for no increase in QE at all, which could be negative. While failing to regain $1.6880 (Aug 4 low), Cable is seen supported at $1.6680 ahead of the minutes.
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ASIAN & EUROPEAN markets fail to rally following the 1.4% gains in NY, further highlighting the unsustainability of the gains in the US, which have been largely dollar-driven. But even the dollar retreat stabilized as oil prices failed to break above the 21-day MA of 79. YEN STRENGTH still the name of the game as CADJPY hits 1-week low at 84.11, eyeing 83.40, EURJPY tests 132.50s and USDJPY is capped at 89.40s. GBP joins JPY in rallying after UK CPI jumped to 1.5% from 1.1% (matching forecasts), but the $1.6880 resistance still holds
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