Consolidation On Mixed Signals

June - 17 - 2010 Author: Christine Allen Respond

Currencies were well matched in a tug-of-war that gave little way by the end of trading. Despite the fact that we saw a lot of data released today, traders seemed unconvinced one way or another. Even though the dollar was stronger against most currencies, gains were so small that it would be hard to suggest that tides were shifting in favor of the greenback. The pound was the biggest mover against the dollar, posting a marginal 0.45% drop, followed by the euro weakening by only 0.15%. Stock markets exhibited the same sort of insecurity, with the Dow barely coming away with a gain. The question is does today’s consolidation signal a change in direction or a continuation of range-bound trading.

Housing v. Manufacturing

Today’s data saw evidence mounting for a divergence between the health of housing and manufacturing. On the one hand, housing seems to be on the precipice of a drawn out period of stagnation. Today’s 10% plunge in Housing Starts, marking the largest decline in over a year, managed to affirm the case that without the first-time home buyer tax credit to buoy demand, it would be unlikely for any improvement to continue. Combine the expiration of government aid and a still uncertain employment market and it would be hard to expect consumers to be too eager to commit to a home purchase. This holds especially true for new homes, which tend to be more expensive than existing homes. To add insult to injury, we saw that Building Permits, often viewed as a leading indicator for housing construction, also slid to a one-year low, making the outlook for housing look even bleaker. The withdrawal of stimulus in the housing market stands to be a proxy for how the economy will fare as government support is exited across other sectors of the economy. On the brighter side of things, manufacturing continues to lead the recovery, with Industrial Production posting the biggest gain since last August.

Aside from the Housing and Manufacturing story, we were also met with a rather dismal report on Producer Prices. The index showed that prices actually declined for the second straight month. The complete lack of anything that symbolizes a building of inflationary pressures gives the Federal Reserve plenty of leeway in keeping rates low for an ‘extended period.’ In addition, today’s report on Capacity Utilization also added to the case for prices to remain subdued in coming months. The report showed that utilization stands at only 74.7%, below the long-term 80% average. With plenty of slack still left in the economy, it stands to reason that deflation will be more of a concern than inflation.

In Store for Tomorrow
There are several critical reports scheduled for tomorrow that warrants particular attention. Among them includes the report on Consumer Prices. With today’s Producer Prices and Capacity Utilization both indicating that inflation is on a downward trajectory, it stands reasonable to believe that consumer prices will be on a similar path. At the same time we have Jobless Claims data and the quarterly Current Account balance. To end the day we have the Philly Fed Manufacturing Index, which has been preceded by a number of indexes pointing toward a strong manufacturing sector, and Leading Indicators.

EUR: SPANISH CREDIT LINE DENIED, BUT STILL HAS EFFECT

The euro struggled out of the gate after an article by a Spanish newspaper which described the creation of a new credit line for Spain hit the wires. The article asserted that in order to avert a Greek-like scenario, the EU, IMF, and U.S. Treasury were proposing a plan to offer a credit line possibly totaling EUR 250 billion to the embattled country. However, the story was fervently denied by all parties involved. Nevertheless, that was not before the story did some damage as the spread between Spanish government debt and the yield offered on safer German Bunds widened to the most since before the euro’s creation. The story only managed to remind markets of the challenges still being faced by many Eurozone countries. Separately, French President Sarkozy announced new measures today aimed at improving the nation’s fiscal stance, in a proposal that included boosting the retirement age to 62 and increasing taxes across the board. On the data front, we received Consumer Prices which on an annualized basis showed the largest gains since late-2008. The surge in prices was mostly as a result of the 9.2% surge in energy prices and the consistent weakness in the euro, a factor that makes imports more expensive. Inflation was very tame on a monthly basis, rising only 0.1%, meaning that the ECB still has some slack before they will have to respond to the threat of inflation. The ECB’s monthly Bulletin is due for release tomorrow.

GBP: EMPLOYMENT NUMBERS NOT ENOUGH TO OFFSET DROP IN CONFIDENCE

A decent sized drop in the pound was seen as a rise in employment was unable to compensate for a fall in confidence. The employment situation in the U.K. grew slightly more optimistic as both the ILO Unemployment Rate and the Claimant Count rate fell by 0.1%. In addition, we saw that the number of Britons claiming jobless benefits came in at the strongest in over a year. Still, the employment market may face a number of particularly harsh headwinds going forward. With severe spending cuts expected to be announced in the emergency budget scheduled next week we may be in for a round of public-sector job losses. This leaves tremendous pressure on the private sector, which accounts for 4 in 5 jobs, to pick up the slack and continue the trend of improving employment conditions. A report today did show that job vacancies in the financial sector rose by 82% from last year, but that amount may not serve as a sufficient buffer. Another reason to be wary of the job gains is the fact that a record number of Britons are considered inactive, the ranks of which are not accounted for in the unemployment rate. On a further down note, Nationwide Consumer Confidence sank sharply by the largest margin in nearly two years, signaling the fact that individuals are not necessarily comfortable with the state of the jobs market. Retail Sales should shed new light on the health of the consumer tomorrow.

CAD: CARNEY STRESS FURTHER HIKES NOT SET IN STONE

Commodity currencies fought hard to rally back after earlier losses after a new bout of uncertainty hit markets. Now that things have settled, the loonie, aussie, and kiwi are looking at more modest losses. In a speech today, Bank of Canada Governor Mark Carney stressed that fact that, in light of an “increasingly uneven global recovery”, “no particular path in monetary policy is preordained.” Since the very moment that the BoC took action to raise rates in early June, they have been taking steps to talk down the chances of further hikes. Even though the economy seems primed for higher rates, Carney’s concerns of a more “protracted recovery” are likely to curtail the pace of adjustment. Even though Canada’s performance is nothing to be trifled with, the BoC governor pointed out that “Canada is not as productive as it should be.” Wholesale Sales is on tap for tomorrow. In Australia, we received a double-whammy of disappointing reports. First, the Westpac Leading Index came in at the weakest in three months, the first contraction after 10 consecutive months of improvement. Secondly, Dwelling Starts came in far below expectations. In New Zealand, consumer confidence improved to a level above the indices long term average.

JPY: SERVICE SECTOR POSTS COMEBACK

USD/JPY remains range-bound on the somewhat conflicting evidence between U.S. data and continued jitters in Europe. Japan’s Tertiary Index, which tracks service sector demand, posted a rise for the first time in three months to 2.1%. Since the services sector encompasses the majority of Japan’s economy, today’s report is key in underscoring the viability of their recovery. It also says something about the health of the consumer, which judging by the recent rise in household confidence appear willing to spend again. Japan’s domestic markets have definitely lagged the pickup in the export market, but at this point any pullback in international demand may be supported by renewed consumer spending. However, plans for fiscal cleansing poses a risk to that scenario. An advisor to the Japanese government said today that the government will have to raise consumption taxes by as about JPY 7 trillion to make good on Kan’s pledge to cap the nation’s reliance on debt markets. Clearly the austerity plans are as important as ever as we can surely expect them to be under harsh scrutiny by credit rating agencies. Japan’s Coincident and Leading Index are due for tomorrow.

USD/CHF: Currency in Play for Next 24 Hours

The USD/CHF will be the currency pair in play for the next 24 hours. In the United States, we expect May Consumer Price Index and Weekly Unemployment Claims figures at 8:30 ET or 12:30 GMT and the Federal Reserve Bank of Philadelphia’s Manufacturing Index at 10:00 ET or 14:00 GMT. In Switzerland, we have the Swiss National Bank Monetary Policy Assessment, along with the 3-month Libor Target rate at 3:30 ET or 7:30 GMT.

USD/CHF is currently trading in the Sell Zone, which we determined using Bollinger Bands. Near-term resistance, at 1.1428, is the pair’s Lower One-Standard Deviation Bollinger Band. The closest level of support lies at 1.1035, the pair’s 38.2% Fibonacci Retracement level drawn from the November low of 0.9911 to this month’s high of 1.1730.

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