UPDATE – For BKT subscribers, there will be no changes. We are not going to be away from the markets and will continue to send 2 to 3 trade alerts a week
After building DailyFX from scratch and spending 6 years as its Chief Strategist, it is bittersweet for me to announce that Boris Schlossberg and I have left FXCM / DailyFX.
We are going on hiatus for the next 2 weeks and on August 18, we will officially announce our new plans. Not only are we joining a great new firm, but we have a ton of ideas that will blow your socks off!
I may or may not blog from now till then, but the high quality research that you have come accustomed to will be back in a heartbeat, I promise =)
The recovery in the US dollar and in equities has been very impressive. In yesterday’s Daily Fundamentals, I said that “despite today’s move, the dollar’s rally may not be over.” Gold continues to provide a strong indication of the market’s risk appetite and dollar sentiment. If you want to figure out if investors are really nervous, just take a look at gold. Today, gold prices have fallen by another $10 to $919.00 an ounce. This suggests that the dollar’s rally is set to continue. There could and will probably be retracements, but the overall trend of the dollar is up.
As previously indicated by the bounce in the University of Michigan consumer confidence numbers, sentiment in the US has improved according to the Conference Board’s survey. Although jobs are increasingly “hard to get,” consumers are starting to accept the current state of the US economy as the way of life. This does not mean that the troubles are behind us because house prices fell by the largest amount on record in May. Going forward, the stability of the US economy will depend on oil prices staying low.
Crude is trading at approximately $121 a barrel and as long as it remains at current levels or falls further, inflation and inflation expectations will ease. Not only will this loosen the noose for central banks around the world, but it will also provide respite for consumers and businesses. In turn, this will add further fuel to the dollar which I expect to break 1.55 against the Euro and at least 109 against the Japanese Yen.
However keep in mind that even if the dollar is rallying, it does not necessarily mean that the US economy is stabilizing. The announcement that Merrill Lynch is looking to raise capital by selling new shares and selling their debt at a fifth of their value is not completely good news because it indicates that they are desperate for cash.
Therefore the dollar’s move represents a realignment of expectations. The weakness of the US economy has already been priced into the market, but the deterioration in places like the Eurozone, New Zealand and the UK is catching many traders by surprise, triggering weakness for the Euro, New Zealand dollar and British pound (See 3 Currencies to Short).
Looking ahead, the ADP Employment report is due for release tomorrow. The market expects private sector employment to fall by 60k jobs. Although the report is a leading indicator for non-farm payrolls, traders need to be careful of relying solely on this report since it can have a shaky track record.
Here is the “In the Financial Papers Radio Broadcast” (Length: 6:01 minutes). The player should load automatically. Please let me know if you like it. Contact Kathy
In the Financial Papers:
Fears of Loan Defaults Drive Sharp Volatility in Stocks
Pump Prices Hurt Americans Not Just in the Pocketbooks
G8 Leaders Playing Down Their Power to Reduce Oil Prices
German and UK Industrial Production Drop
Spain at Risk of Recession, Could Impact Entire Eurozone
Are Speculators Driving up Oil?
Bernanke Says Federal Reserve May Let Investment Banks Borrow Into 2009
Fed’s Wall Street Lending May Keep It From Raising Interest Rate This Year
Oil Falls for Second Day, Trades Below $138; Gold, Corn, Aluminum Decline
UK Could Cut Interest Rates This Year
Here is the “In the Financial Papers Radio Broadcast” (Length: 6:14 minutes). The player should load automatically. Please let me know if you like it. Contact Kathy
In the Financial Papers:
Fed Vice Chairman Signals Pause
US Producer Prices Mixed
German PPI vs. ZEW
Australia RBA minutes indicate concerns on high inflation, growth uncertainty, hawkish stance
Bank of Japan Kept Rates Unchanged
Oil Rises to a Record After Pickens Says Prices May Reach $150
Car Makers’ Boom Years Now Look Like a Bubble
UK Ends NICE Era
Where are Home Prices Still Holding Up?
ECB Steadfastly Hawkish
For the better part of this past week, the Euro, Japanese Yen and British pound have been trapped within a tight trading range against the US dollar. Even though the moves in all 3 of these currency pairs have been relatively significant, especially in the EUR/USD, they pale in comparison to the moves in the Australian and New Zealand dollars.
Currencies in Play Next Week:
The Euro staged a very strong rally against the US dollar after quietly selling off for the past 3 days. The move was due almost entirely to the US numbers as the Euro started to gain strength quickly following the University of Michigan Consumer Confidence report. Eurozone economic data was actually bearish for the currency with the trade surplus swinging into a deficit in the month of March. This provide evidence that the strong euro is finally weighing on the region’s economy. Fundamentals will be heating up for the Euro next week with German producer prices, the ZEW survey, IFO and PMI reports due for release. We actually expect most of the numbers except for the inflation reports to be Euro negative. With factory orders and industrial production turning negative, it would be a surprise if business sentiment managed to improve.
The Canadian dollar will be a big focus with consumer prices and retail sales due for release. I expect CPI to be hot and retail sales to be weak, but that depends upon the level of wholesale sales.