"How does Katrina alter the outlook? The truth is, we don't really know. My inclination is to read, listen and watch and not rush to judgment about how the disaster will impact the economy or how monetary policy ought to respond."

Richard Fisher,
Federal Reserve Bank of Dallas President
Tuesday, September 13, 2005 08:32 GMT

More Greenback Strength

Still getting the money.  That was the main message of last week as the US Trade Deficit of –57.9B was easily offset by the spike in TICS data which posted a larger than expected surplus of $87.4 Billion. Never mind that both Empire and Philly Fed printed  weak results. In fact as many analysts have pointed out if it weren’t for the rise in the Prices Paid component both indexes would have registered negative values - hardly a sign of strength in US industrial sector.  Nevertheless the market ignored the gloomy implications and the dollar rose across the board against all the majors.

Next week, the FOMC meeting takes front and center and may provide some real drama for the markets.  For the past two weeks a large part of greenback’s strength has been derived from the fact that most players were convinced that Fed would ignore Katrina and continue hiking. The Empire and Philly results of last week have cast some doubt into that thesis. If the Fed does indeed halt – even for one month - the dollar friendly psychology may turn on a dime, as the primary reason for dollar strength would disappear

"Cutting France's unemployment rate to under 5 pct within 10 years is a realistic target for the government.

Dominique de Villepin,
France Prime Minister.
Monday, September 12, 2005 09:13 GMT

Uh – What’s Next?

Well the quagmire that is the German elections is the by far the dominant trading concern in the euro as we head into this week. With neither Merkel nor Schroeder winning a clear majority the prospect of a stalemate and political deadlock has gripped Germany. “Worst of all possible outcomes,” was how one German business executive put it. But we wonder if the market may be over reacting. The “grand coalition” government while cumbersome, may also be effective as centrist politicians free of their left and right wing shackles could enact a reform agenda that is demanded by most of the populace.  In fact, a close look at both Schroeder and Merkel’s platforms reveals remarkable similarity on key economic points such as the necessity to reduce corporate income rates. IF anything parts of Schroeder’s agenda is more market friendly, especially in light of tact that Merkel wants to increase the Value Added Tax.

With further economic changes clearly a goal for vast majority of all Germans, the future of Germany may not be as bleak as the initial hand wring would suggest.  With only the ZEW as the main economic release of the week, the political struggle will continue to reverberate in the upcoming week. 

"There is a possibility that maintaining the huge outstanding balance of current accounts at the Bank will hinder the process of restoring the proper functioning of the market and cause excessive risk taking based on unrealistic expectations that the present extremely accommodative conditions will continue for a very long time."

Katsutoshi Fukuma, Member of the Bank of Japan's Policy Board.
Wednesday, September 14, 2005 08:43 GMT

Basking in the Afterglow

A very uneventful week after the big political win by Prime Minister Koizumi saw the yen sell off on general dollar strength but  the true action was in EUR/JPY which traded as the Koizumi/Schroeder spread for most of the week, diving to 134.50 before recovering to 135.50 by end of the week. The one economic event of note was the better than expected results from  Japanese GDP  which rose an impressive 3.3% vs. projections of 1.5% gain.

Next week the calendar is continues to remain light with only the Tertiary Industry Index likely to command the attention of the market. We will keep a close eye on Convenience Store Sales which have shown a depressing string of declines on a year over year basis suggesting that deflation is by no means  expunged from Japanese economy. Finally the unit may get some welcome boost from the oil markets if they show any weakness this week.

"The only way forward for Europe is to invest rather than protect. The European economy has shown itself to be fragile."

Gordon Brown,
UK Chancellor of the Exchequer.
Friday, September 9, 2005 16:13 GMT

Cable Finally Falls

The pound took a tumble last week but held the 1.8000 figure despite further news that UK consumer was in serious retrenchment mode. UK Retail Sales reported no gain but more importantly, the months prior numbers which were originally posted as –0.3% were actually revised downward to –0.6%. As Dennis Garman always notes its the revisions more than the actual data, that can better tell the true trend. 

The one positive of the week was  the better than expected results from the unemployment front as the Claimant Count increased by only 2.1K vs. 4.8K projected. Still this was the 6th consecutive rise in unemployment rolls in UK.

This week will be dominated by housing data and the Industrial Trends Survey report. If housing prices begin to show some weakness, the market will quickly come to the realization that further rate cuts from BOE are due and pound may yet have more to fall.

Swissie Confounds

Swissie continued to record the worst performance of all the majors, despite the best fundamentals in the field. As expected, the SNB did not raise the interest rates this quarter but the hawkish tone of the message suggested that the bank will tighten in the next meeting in December.  The franc however, continued to falter falling 206 basis points for the week. The one gee-political issue that may be weighing the currency is the referendum vote on further EU integration scheduled for this Sunday. If the vote receives a majority of yeas as expected the doubt will be lifted from the unit and the franc is likely to rebound materially.

Boris Schlossberg is a Senior Currency Strategist at FXCM.