US Dollar
When it comes to trading currencies, things are always changing, which keeps our job interesting. Last year, we were all amateur meteorologists trying to figure out weather patterns and the probability of another major hurricane happening after Katrina and this year, we have all turned into amateur military strategists. North Korea has stirred up the markets with news that they have conducted another nuclear test over the weekend. The dollar has rallied while the Japanese yen has sold off, but the movements in both of currencies been limited because the responses from the major powers around the world are unclear. This is not the first time that North Korea has tested a missile. They have done so on many occasions over the past few years and the responses have only been limited to some harsh words. The question this time around is whether the outcry that we have heard thus far is the extent of the reaction that we will hear from the major powers or whether we will actually see sanctions or military action. If nothing more is done, the markets may soon forget about North Koreaâ,"s tests, just like they did back in July after the two long range missiles failed within a minute. North Koreaâ,"s underground tests make it difficult to determine whether the test was large or small or whether it failed half way or was completely successful. Either way, for the time being, traders looking to fade the yen weakness should be very careful. Aside from North Koreaâ,"s test, the markets have been very quiet with the US, Canadian and Japanese markets closed for holidays. The Canadian dollar is stronger as OPEC members reach an informal agreement to cut oil production but they stopped short of calling an emergency meeting to formalize the agreement. A number of Fed speeches as well as the FOMC minutes from the September 20 meeting and Beige Book report are expected this week. FOMC voting member Janet Yellen was the first to speak. She reiterated the Fedâ,"s overall concern for inflation but was slightly more dovish than the other members when she noted that interest rates â,"appears appropriateâ, and are now in a â,"moderately restrictiveâ, range. She also feels that the decline in oil prices should reduce core prices, which will make a decline in inflation the â,"most likely outcome.â, For the time being, despite all of the dollar bullishness that has come after the US payrolls report, the Federal Reserve is still more likely to reduce rates than raise them over the next six months.
Euro
The Euro is currently trading at two month lows against the US dollar and has weakened for five consecutive trading days. In contrast to the British pound, it has held up relatively well in the face of broad dollar strength. German data released this morning was mixed with industrial production coming out much stronger than expected but at the same time, the trade surplus fell more than expected as both imports and exports worsened. Tomorrowâ,"s numbers should fare a bit better as both French and Italian industrial production is expected to have improved in the month of August after a surprise drop in July. However what we will be watching most closely are the comments from ECB officials. EU Finance Ministers will be holding a meeting in Luxembourg and we are expecting comments from at least Trichet and Liikanen. Although Trichet only spoke last week, any reiteration of the central bankâ,"s plans to raise interest rates could help the Euro recuperate some of its recent losses as it reminds traders that the ECB is still the only central bank to be aggressively raising interest rates at the moment.
British Pound
Of the four majors, the British pound became the dayâ,"s biggest loser after producer prices reported a big tumble in the month of September. Input prices fell by 1.9 percent while output prices fell by 0.3 percent. Todayâ,"s drop in inflation was primarily due to lower energy prices. This should not be surprising to our readers since we have said often that the drop in oil will reduce inflationary pressures globally and todayâ,"s PPI report from the UK is clear evidence that of that happening. In fact, the UK will not be the only country where the September inflation reports surprise to the downside. The drop in UK PPI today has even raised speculation by the UKâ,"s Telegraph that the Bank of England could begin cutting interest rates early next year. Although we think that it is premature to make such a prediction since a cut will be contingent on a global slowdown, it does reflect the marketâ,"s bias at the moment. Meanwhile on the bright side, house prices came in stronger than expected, as the sector continues to show signs of stabilization.
Japanese Yen
The Japanese Yen has fallen victim to market jitteriness after North Koreaâ,"s nuclear test. Uncertainty is never good for a countryâ,"s currency and unfortunately for Japan, their geographical proximity to North Korea puts them at great risk of getting involved in the conflict. However unless we see a more aggressive response from the international community, the yen may quickly revert back to keying off of fundamentals. Tomorrow we are expecting one of our favorite pieces of Japanese economic data, the Eco Watchers survey or otherwise known as the â,"man on the streetâ, survey. We expect the drop in oil prices to make a meaningful impact on confidence. Later this week, we are also expecting the official consumer confidence index along with the Bank of Japanâ,"s Monthly report and comments from BoJ Governor Fukui. With the new leadership in Japan, it will be interesting to see if Fukui shifts his monetary policy stance. If he continues to call for tighter monetary policy, the yen could finally rebound, but if he backs off his hawkish stance and warns about the risks to growth or notches down their semi-annual outlook, the yen could give way and allow for the yen linked currency pairs to hit new highs.
Kathy Lien is the Chief Currency Strategist at FXCM.
Free Festival of Traders Videos
