US Dollar: Time to Find Out if the Bernanke Put is Still in Place? 8/21/2008 5:30 PM EDT (GMT +5)

Today’s Biggest Percentage Movers

• USD/CAD ( 170 pips or 1.60%)
• USD/JPY ( 148 pips or 1.35%)
• NZD/USD ( 89 pips or 1.25%)

The Stories in the Currency Market

When oil prices dropped to $111 a barrel on August 15th, everyone across the financial markets breathed a sigh of relief as oil no longer became the biggest threat to global growth. There was hope that consumer spending and corporate profitability would return and as a result the dollar rallied. Therefore it is no surprise to see the dollar weaken across the board as oil prices jumped close to $6 a barrel. Sentiment in the commodity markets have turned on the combination of geopolitical tensions and Tropical Storm Fay. The correlation between oil and the US dollar has been greater than 70 percent since the beginning of the year and for the time being, this correlation continues to hold (chart of the relationship between oil and USD/EUR). The 3 day Jackson Hole Conference started today. This year’s forum is aimed at examining past and present financial crises and the challenges confronting central bankers around the world. Last year’s conference was monumental in the fact that it preceded the 7 interest rate cuts delivered by the Federal Reserve. Bernanke reassured the markets that the central bank would prevent a dramatic crisis and do all that they can to limit the slowdown in growth. With Fannie Mae and Freddie Mac still posing serious problems and the market becoming increasingly worried about the health of Lehman Brothers, we expect Bernanke to come under more serious heat at Jackson Hole. He will be delivering a speech on Friday about financial market stability. Although we do not expect any shocking comments from him, as traders we should always be prepared for surprises. The Philadelphia Fed survey and leading indicators were released today. Manufacturing conditions in the Philadelphia region improved this month, but not as much as the market was expecting. Leading indicators fell significantly as building permits, jobless claims and stock prices slip. The weak data added fuel to dollar’s demise. Given the strength of today’s move, we would not be surprised to see the EUR/USD test 1.50.

British Pound: Hope for the UK?

The UK economy is facing problems, but you could never tell by looking at the 0.8 percent rise in retail sales last month. Consumer spending has been particularly volatile with spending recovering after dropping by the most in 22 years in June. The month before that, sales increased 3.9 percent, another record. Even the Bank of England has admitted that the “erratic movements in retail sales had made it hard to judge the underlying trend in retail spending.” What we do know is that despite a deteriorating economy and rising prices, UK consumers remained resilient as they continued to buy discounted goods and mobile phones. This data conflicts with the BRC retail sales report so we still believe that consumer spending is more likely to fall that rise in the coming months. The most important release tomorrow is the second quarter GDP report. On average, retail sales declined in the second quarter compared to the first quarter, but the trade picture improved modestly. The odds are skewed towards a marginally weaker GDP report, which is what the market is already anticipating.

Euro: Impressive Rally

The Euro staged a very impressive rally on the heels of dollar weakness and steady economic data. Manufacturing and Service sector PMI was released this morning. Even though both sectors remained in contractionary territory, manufacturing activity was actually slightly better while service sector activity only deteriorated modestly. The only piece of Eurozone data is the current account, which should only have a limited impact on the Euro. Instead, the strength or weakness of the currency pair will be determined by the US dollar, which is at the whim of oil prices. Meanwhile, the Swiss franc has strengthened against both the US dollar and the Euro. This morning’s Swiss economic data was mixed with trade and inflation increasing but analyst sentiment deteriorating.

Oil and Gold Prices Drive Commodity Currencies Higher

Oil and gold prices skyrocketed today, driving the Canadian, Australia and New Zealand dollars higher. Oil prices rose close to $6 a barrel while gold prices surged $23 an ounce. The Canadian and New Zealand dollars were the day’s best performing currencies against the greenback. Consumer price growth in Canada slowed on a monthly basis, but the annualized pace of growth hit a 5 year high. This in conjunction with the stronger retail sales report released yesterday will keep the Bank of Canada on hold for the next few months. New Zealand reported stronger credit card spending. Combined with the rise in visitors, we expect retail sales to pick up in July. Although the Australian dollar also rose in sympathy with the Loonie and Kiwi, the sharp drop in new motor vehicle sales was certainly not good news.

USD/JPY Selling Hits All of the Yen Crosses

All of the Japanese Yen crosses with the exception of CAD/JPY lost value today despite the fact that the trade surplus sank to a 5 month low. This is an example of the strain that the global slowdown is having on the Japanese economy as well as the impact of rising oil prices. The minutes from the Bank of Japan’s latest monetary policy meeting are also due for release this evening, we expect no surprises from the release.

GBP/USD: Currency Pair in Play Over the Next 24 Hours

The most potentially market moving piece of economic data due out tomorrow is the UK GDP Report (8:30 AM GMT)

The currency pair that we are keeping an eye on is the GBP/USD. Yesterday, we indicated that the GBP/USD was trading within the Sell Zone, which is established using Bollinger Bands. It is still trading within the sell zone but is prime for a breakout to the upside. We are still watching the 1.8800 / 30 level for resistance. If that level is broken, there is scope for a rally to 1.90. By Kathy

About The Author

Lien has extensive knowledge within the interbank market, particularly in trading spot FX and options. She has written for numerous publications, is frequently quoted on financial media outlets, and is the author of several books, including Millionaire Traders. Read more >>

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