Dollar Unfazed By Strong Durable Goods

Orders for durable goods produced in the United States unexpectedly gained 1.3 percent, the Commerce Department said Wednesday in Washington. To some extent, the gain in orders reflected growing demand from abroad because of a relatively cheap U.S. dollar. In fact, despite the recent gains, the U.S. dollar exchange rate is still very cheap when we look at the last five years. Indeed, Dollar’s undervaluation is now likely to lead to a substantial improvement of the U.S. Balance of Payments through continued strong export performance. Moreover, the recent sell off in commodities, particularly in oil, should alleviate some external pressure in the U.S. economy. The U.S. runs a current account deficit of nearly 6 percent of the GDP and the U.S. economy benefits the most when energy prices are lower. Yet, with the world economy slowing down is reasonable to think that the demand for U.S. products will also begin to slow down. Moreover, some members of the Federal Reserve are deeply concerned that the recent spike in economic activity had more to do with short term spending of taxes rebates than anything else, according to the latest FOMC minutes released on Tuesday. In fact, according to Fed Funds futures there is a 90% change that the Federal Reserve will keep rates unchanged.

Today, the forex market was very volatile and most intraday trends were dominated by waves of profit taking. Nonetheless, the euro rallied today against the U.S. dollar after Axel Weber, Germany’s Bundesbank president and a voting member of the ECB governing council, said that a reduction in interest rates is "premature". Indeed, despite the recent easing in the price of oil, the ECB is still very concerned with inflation and second round effects of oil. Regardless of the ECB comments, the U.S. dollar has been very strong over the past month and we expect this trend to continue going forward.

Euro Reversal Stymied By Drop In German CPI

Through the European trading hours Wednesday, the euro was enjoying a modest but consistent rebound against its US counterpart owing largely to the comments delivered by Axel Weber. The policy member’s suggestion that forecasts for a near-term rate cut clearly took the wind out of the speculation developing behind the dovish ECB argument. However, his comments didn’t go too far in terms of putting the market off its consensus for the eventual turn in rate bias. Looking at overnight index swaps, the market was still pricing in 33 basis points of easing (an assured quarter point hike and debate about a second) over the coming 12 months – only a few points off yesterday’s reading. This modest impact in rate expectations (and indeed the euro itself) shouldn’t be too surprising as it was clear that forecasts for rate cuts were already very modest and few fundamental traders were looking for any action in the near term. For those that thought Weber’s comments were the only (or even the most important) fundamental driver for the day, they clearly missed out on a far more interesting release – the preliminary readings on German consumer inflation. The headline CPI figure cooled more quickly than expected from a 14-year high 3.3 percent to 3.1 percent through August. While this shift was largely due to the 20 percent-plus tumble in crude, it still has a more tangible influence over the rate outlook.
Pound Falters As Earnings Reports Show Housing Strain, Event Risk Picks Up Thursday

It was another range bound session for GBP/USD Wednesday as the sterling found little comfort in the strong one percent advance in the domestic stock market and instead focused on disappointing results from the UK’s largest home builder. Taylor Wimpey reported a 1.4 billion pound loss through the first half of the year, leading macro investors to forecast an inevitable recession. However, this earnings report is merely a corporate reflection of what economic data has already warned us of, that tumbling home prices and sales has lead to a drop in construction activity. And, where the market influence of this data ends, major technicals have taken up the pound’s cause with a major Fibonacci retracement at 1.83. Looking ahead to tomorrow, the fundamentals may have a greater impact on price action. The Nationwide housing price report, CBI Distributive Trades report and GfK Consumer Confidence survey are all scheduled for release. This should offer a good read on the housing, business and consumers sectors’ impact on growth going forward.

A Rebound In Commodity Prices And Data Helps Comm Bloc

All three of the major commodity currencies (the Australian, New Zealand and Canadian dollars) closed higher through Wednesday’s close thanks to a smattering of economic data and a general rebound in key commodities. The tide lifting all of the currencies was the rebound in crude prices – a proxy for the entire raw materials group. Oil prices (WTI) rose for a third consecutive session and closed above $118/barrel as traders tuned into Hurricane Gustav working its way up through the Gulf of Mexico. So far, the advance has been relatively slow; but should there be any damage or delays to shipments and/or refining, $122 may once again be tested. From the economic front, the New Zealand dollar found its own bullish drive from the NBNZ business confidence report for August. The sentiment gauge marked a surprise improvement to a nine-month high as the sales outlook turned positive for the first time in months thanks to the pull back in raw material prices and falling easing interest rates. Looking out over the next 24 hours the Canadian current account balance and Australian investment numbers will be important.

Yen Awaiting Word On Health Of The US Economy

The Japanese yen was looking at a modest selloff across the market Wednesday as temperate gains in stocks and a lack of major event risk left fundamental traders to speculate on the future of the carry trade. Yield differential expectations (the different between rate forecasts for high-yielding and low-yielding currencies) continued to fade with both the pound and Aussie dollar taking on additional weight after disappointing data. However, risk was relatively untouched. This may not be the case tomorrow though as one of the market’s top pieces of event risk crosses the wires. The revision to US 2Q GDP will not only offer a forecast for export demand, but it will also spur speculation for revenues from the major US banks – the source for most of the world’s write downs and arguably the credit crunch itself.

Terri Belkas is a Currency Strategist at FXCM.