Forex Weekly - US DOLLAR - BRITISH POUND - EURO

This past week was supposed to be a quiet one in the foreign exchange market but between OPEC’s decision to cut oil production for the first time in 8 years and the brewing banking crisis in Europe, we’ve seen a sharp increase in volatility across the financial markets.

U.S. stocks traded lower as risk aversion permeated the equity and currency markets. Investors practically forgot about the Federal Reserve’s potential rate hike at the end of the year and discounted the significance of stronger consumer confidence, service sector activity, durable goods, trade and GDP data. These reports strengthen the case for a December rate hike even as personal income and spending growth slows but if Europe’s banking troubles escalate the strain that it has on the financial markets may make it difficult for the Federal Reserve to pull the trigger on raising rates. 

 

US DOLLAR

Data Review

·         New Home Sales (MoM) -7.6% vs. -8.3% Expected

·         Markit Services PMI 51.9 vs. 51.2 Expected

·         Markit Composite PMI 52.0 vs. 51.5 Prior

·         Consumer Confidence 104.1 vs. 99 Expected

·         Durable Goods Orders 0% vs. -1.5% Expected

·         Advanced Goods Trade Balance -$58.4b vs. -$62.3b

·         GDP (Annualized) (2Q T) 1.4% vs. 1.3% Expected

·         GDP Price Index 2.3% vs. 2.3% Expected

·         Personal Income 0.2% vs. 0.2% Expected

·         Personal Spending 0.0% vs. 0.1% Expected

·         Chicago PMI 54.2 vs. 52.0 Expected

·         U of Mich. Confidence 91.2 vs. 90 Expected

·         U of Mich. Current Conditions 104.2 vs. 103.5 Prior

·         U of Mich. Expectations 82.7 vs. 81.1 Prior

 

Data Preview

·         JN Tankan Large Manufacturing Index Report- Japan's Quarterly Business Report can be very market moving but hard to predict

·         US Manufacturing PMI, Construction Spending and ISM Manufacturing- Potential for upside surprise given Stronger Empire, Philly, Dallas, Kansas and Richmond. Lower Chicago

·         ADP Employment Change and Trade Balance- Potential for upside surprise given stronger Advance trade data

·         Services and Composite PMI, ISM Non-Manufacturing Composite, Factory Orders- Will have to see how ISM manufacturing fares

·         Non-Farm Payroll Change, Unemployment Rate and Employment Report- Will be very market moving but difficult to handicap. Likely to be stronger though

Key Levels - USD/JPY

·         Support 100.00

·         Resistance 103.00

Yet a U.S. rate hike will still be a focal point next week with ISMs and non-farm payrolls scheduled for release. Stronger manufacturing and service sector activity along with a solid jobs report could get investors excited about a year end rate hike but the amount of job growth and pace of wage gains would need to be very good. We heard from a number of U.S. policymakers over the past week and there was clear hesitancy in most of their voices. The U.S. economy may be improving and jobs are growing but inflation and productivity is still too low and unless there are improvements over the next 3 months, a number of policymakers could vote against raising rates especially if Deutsche Bank’s troubles turn into a full-fledged crisis for the region.

As for the U.S. dollar, risk aversion should keep the greenback bid against high beta currencies like the euro, British pound, Australian and New Zealand dollars. We don’t expect significant gains in USD/JPY or USD/CHF because these pairs usually fall when stocks decline and investors won’t be eager about buying these currencies ahead of Friday non-farm payrolls. Buyers should sweep into USD/JPY near 100 with sellers coming in near 102 pre-NFP. Japan’s Quarterly Tankan report is also scheduled for release and while economists are calling for stronger business confidence we think confidence could weaken in light of yen strength and weaker consumption.

 

BRITISH POUND

 

Data Review

·         GDP (QoQ) 0.7% vs. 0.6% Expected

·         Current Account Balance £-28.7b vs. £-30.6B

Data Preview

·         PMI Manufacturing- CBI Unchanged so no major changes expected in UK manufacturing activity

·         Markit Services and Composite PMI- Possible strength given sharp rise in GfK confidence

·         Industrial Production, Manufacturing Production and Trade Balance- Will take guidance from UK Manufacturing

Key Levels - GBP/USD

·         Support 1.2800

·         Resistance 1.3050

Last but not least, sterling remained under pressure throughout the week. There weren’t any major economic reports released and no new Brexit headlines but Bank of England member Shafik reminded investors that rates might need to fall further. The case for a rate cut will become clearer in the coming week with the U.K.’s PMI reports scheduled for release. If manufacturing and service sector activity slow, GBP/USD could drop to support at the August low of 1.2866. If the numbers are good, the currency could rise to the 50-day SMA near 1.3130. Also Deutsche Bank’s troubles raises concerns about other banks in Europe as Credit Suisse and Barclays are also in mortgage settlement talks with the U.S. government. Should Barclays fall into a similar crisis of confidence, the Bank of England will step up its calls to ease.

 

EURO

Data Review

·         GER IFO Business Climate 109.5 vs. 106.3 Expected

·         GER IFO Current Assessment 114.7 vs. 112.9 Expected           

·         GER IFO Expectations 104.5 vs. 100.1 Expected

·         GE Unemployment Change 1k vs. -5k Expected

·         GE Unemployment Rate 6.1% vs. 6.1% Expected

·         GE CPI (MoM) 0.1% vs. 0.0% Expected

·         GE Retail Sales (MoM) -0.4% vs. -0.2% Expected

·         EZ Unemployment Rate (AUG) 10.1% vs. 10.0% Expected

·         EZ CPI – Estimate (YoY) (SEP A) 0.4% vs. 0.4% Expected

Data Preview

·         GE and EZ Services and Composite PMI Revisions- Revisions are not expected

·         EZ Retail Sales- GE retail weaker, FR retail stronger

Key Levels - EUR/USD

·         Support 1.1150

·         Resistance 1.1300

Meanwhile the euro has been surprisingly resilient in the face of Deutsche Bank’s troubles. It dropped to a low of 1.1150 but not much more beyond that. The biggest story in the financial markets this week is the growing fear that DB will become the next Lehman Brothers. Clients are withdrawing excess cash, lowering collateral on trades and generally cutting exposure to the bank. The euro should be trading much lower but it is holding up very well in light of the risks. If this were truly a Lehman moment for Europe, EUR/USD would be at 1.10 and not 1.12. We see only two explanations for the currency’s resilience – German yields are up and U.S. yields are falling or the majority of investors still believe that Deutsche Bank is too big to fail. The only way to stop this crisis of confidence is for Chancellor Merkel to offer a bailout but next year is an election year and this could be political suicide. Merkel has been a vocal about not putting taxpayers on the hook for bank bailouts but at some point, the economic consequences could outweigh the political fallout. If the region’s banking troubles escalate, 1.10 will be an easy target for EUR/USD. 

 

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