US DOLLAR
Data Review
- FOMC leaves Rate Unchanged at 0.25%
- Bank of Japan Leaves Rates Unchanged, Drops Average Maturity Target on Bond Purchases
- Housing Starts (Aug) (MoM) -5.8% vs. -1.7% Expected
- Building Permits (MoM) -0.4% vs. 1.8% Expected
- Chicago Fed Nat Activity Index (AUG) -0.55 vs. 0.15 Expected
- US House Price Index (MoM) 0.5% vs. 0.3% Expected
- Existing Home Sale (MoM) (AUG) -0.9% vs. 1.1% Expected
- Manufacturing PMI 51.4 vs. 52
Data Preview
- New Homes Sales- Potential for downside surprise given weaker existing home sales
- Markit Services and Composite PMI and Consumer Confidence Index- Potential for downside surprise given lower IBD, unchanged Umich index and lower Manufacturing PMI
- Durable Goods Orders- Durable goods can be extremely volatile so difficult to trade
- Advanced Goods Trade Balance and GDP Annualized QoQ- Revisions to GDP are generally made but difficult to predict
- Personal Income, Personal Spending and PCE Report- Potential for downside surprise given that Retail sales and wage growth slowed
- Chicago PMI and U. of Mich Sentiment Report- Revisions can be market moving but difficult to predict
Key Levels - USD/JPY
- Support 100.00
- Resistance 103.00
September has been a challenging month for the U.S. dollar. The greenback lost value against most of the major currencies with AUD/USD and USD/JPY leading the slide. In the early part of the month the dollar’s decline was slow and steady driven by disappointing non-farm payrolls but this week the selling gained momentum after the Federal Reserve left interest rates unchanged. Only a handful of investors expected tightening but many anticipated unambitiously hawkish comments from Janet Yellen who told us at Jackson Hole that the case for a rate hike has strengthened. This language made it into the FOMC statement but probably only as a conciliatory move for the 3 members who voted for an immediate rate hike.
More importantly, Yellen maintained a cautious tone throughout her press conference, suggesting that she is a reluctant bull. Yellen is a dove at heart so the latest slowdown in job growth, wages, manufacturing and service sector activity makes her worried. She fears that raising interest rates prematurely could make it difficult to reverse that trend. As a result, the next 3 non-farm payroll reports will be extremely important and from now until October 7th when September’s figures are released, we expect consolidative trading in the dollar with shallow rallies and retracements. As for data, the U.S. economic calendar is mostly filled with second tier U.S. releases such as new home sales, consumer confidence, durable goods, GDP revisions, personal income and spending. So the focus should be on the 8 U.S. policymakers speaking, four of whom are FOMC voters including Yellen and George who voted in favor of an immediate rate hike. Chances are Yellen’s peers will be more enthusiastic about the recovery, which should prevent the dollar from experiencing a steep decline at the end of the month/quarter. At the same time, since U.S. stocks performed very well in Q3, we could see some dollar selling so the chance of a massive rally end of quarter is slim.
Meanwhile the Bank of Japan made only modest changes to monetary policy this past week. They relaxed the framework for bond purchases by dropping their average maturity target and altered the mix of equity purchases to include more TOPIX. They also maintained their 2% inflation target and left interest rates unchanged, which was widely expected. While the yen initially declined sending USD/JPY to a high of 102.79, the rally fizzled quickly as investors saw the announcement as a big disappointment. There was nothing surprising let alone impressive in the decision and it will be difficult for the central bank to reach its inflation target without additional easing. More rate cuts are likely but there was nothing in monetary policy statement suggesting that it would happen soon. Instead Japanese officials could be waiting for the Fed to do the heavy lifting because rising U.S. rates will take USD/JPY higher, easing pressure on the Japan’s export sector and the central bank. Until USD/JPY closes above 101.50, another run down to 100 remains possible.
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