Thursday, January 20, 2011

Euro Champ, Dollar Chump!

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By Mike Conlon | January 19, 2011

The Euro has been higher against the Dollar 7 of the last 8 days as the Dollar has put in an 8-week low as a result of the sluggish US economy.  This morning the US reported declining housing starts which missed analyst forecasts, though there was an increase in mortgage applications and building permits.

This highlights the difference in market sentiment in that the early Dollar strength this year was more a function of concern over the Euro debt crisis and less about the perceived strength of the US economy.

In the UK, fewer people made jobless claims, though the unemployment rate remained steady and as expected at 7.9%

Overnight in Australia, consumer confidence figures came in worse than expected though that should not be a surprise to anyone as the floods that have ravaged Brisbane would cause even the most optimistic to have caution.

Tonight is the first China state dinner at the White House as President Obama attempts to repair a fractured relationship with China.  Man, would love to be a fly on the wall for this one!    Regardless of the outcome, expect little to change as a result.  But it makes for a good headline.

US stock futures are lower to start the day, and trading in European markets is lower as well, though commodities are higher.  So today is a bit of a mixed bag.

In the forex market:

Aussie (AUD):   The Aussie is mixed this morning, trading higher against the N. American currencies but lower against the rest.   Consumer confidence figures fell from 111 to 104.6, the lowest reading in nearly 6 months.  Lower confidence can be attributed to the flooding.

Kiwi (NZD):   The Kiwi is mostly higher going into tonight’s CPI data release.  Prices are expected to have risen significantly, which could put the possibility of another rate hike back on the table.

Loonie (CAD):   The Loonie is lower across the board as a continuation of yesterday’s dovish comments by the BOC has induced further selling.  Oil prices are higher however, so it will be interesting to see if the positive correlation between the Loonie and oil holds up today, or if there is a mean reversion trade out there.  (Click chart to enlarge)


Euro (EUR):  The Euro is higher across the board as it is rallying on anti-Dollar sentiment.  There is little economic data out to day for the Euro zone and as I mentioned yesterday little take away from the meeting of finance ministers with regard to the Euro debt crisis.  (Click chart to enlarge)


Pound (GBP):   The Pound is mostly weaker this morning despite the fact that jobless claims came in lower than expected for the third month in a row.  This data is positive for the UK economy, though it may be under pressure after yesterday’s soaring inflation data.  While under normal circumstances rising inflation would be currency-positive for the country experiencing it, the UK faces the dual challenge of a reduction in spending and higher prices which could produce the dreaded stagflation.

Dollar (USD):    The Dollar is weaker against all but the Loonie as the sluggish economy here makes other currencies more attractive.  Housing starts fell to 529K, lower than the expected 550K and tomorrow’s existing home sales figures may show a declining housing market.  The weak Dollar is encouraging higher commodities prices though, but US stocks are still lower so there may be a possible reversal there.

Yen (JPY):   The Yen is stronger against all but the Euro as Dollar weakness has encouraged safe haven money flows.  A potential economic slowdown in China could help Japanese exports going forward so this may be a play on Chinese GDP figures that are due out tomorrow.

As is evidenced by today’s market, Dollar weakness is still a major driver of world markets and the correlative effects of the Dollar on commodities may be back en vogue.  Existing home sales and initial jobless claims tomorrow will provide a clearer picture of the health of the US economy.

Absent any further complications in the Euro zone, then we could see some continued Dollar weakness.

Tomorrow will also bring economic data from China, as they will report their GDP figures as well as some PPI and CPI data.  Should there be a material slow-down, then that could affect both the Aussie and Kiwi to the downside.

However if China keeps humming along, then it could further increase risk appetite.  Stay tuned!

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