US Dollar: Oil and Intervention

Today's Biggest Percentage Movers

• AUD/CAD ( + 80 pips or 0.80%)
• AUD/NZD ( + 60 pips or 0.50%)
• AUD/JPY ( + 35 pips or 0.43%)

The Stories in the Currency Market

US Dollar: Oil and Intervention

There has been quite a bit of activity in the US dollar today as oil prices swing from positive to negative territory. Concerns about Tropical Storm Gustav heading closer to the Gulf platforms drove oil above $120 a barrel, but an announcement from the International Energy Agency that they will release stockpiles if needed has helped to reverse the earlier rise. A release of the stockpiles would cement a top in oil. Meanwhile second quarter GDP blew away the market's expectations. Economists were looking for economic activity to expand by 2.7 percent but instead it grew by a whopping 3.3 percent. Exports and consumer spending were the biggest contributors to growth as the tax stimulus checks made a significant difference between April and June. The number will certainly help to allay fears of a recession and highlight the sharp divergence in growth between the US and its major counterparts. However what is most interesting about the strong GDP report is the lack of a lasting reaction in the US dollar. Traders are becoming much more forward looking and continuing to key off oil prices. The labor market on the other hand remains a cause for concern. Even though jobless claims declined from the prior week, continuing claims climbed to a 5 year high. Many companies continue to report slower activity, which leaves traders skeptical of the hot GDP numbers. Personal income and personal spending are due for release tomorrow along with the Chicago Purchasing Managers index, but expect liquidity to dry up significantly after the US numbers at 10am Eastern as US traders pack up for the long weekend. We do want to point out a fascinating article in today's Nikkei Net. According to the report, the US considered a coordinated intervention to buy US dollars in March on concerns about financial market stability. They even had serious talks with the ECB, but eventually never followed through with it. Coordinated intervention to buy dollars at the time could have a made very big difference in terms of reassuring foreign investors and putting a lid on inflationary pressures.

Euro: Still Struggling to Break Above 1.48

Once again the Euro has tried but failed to close above the 1.4800 price level against the US dollar which is a key resistance point for the currency. Eurozone data was much stronger than expected, helping to drive the currency higher. The number of people in Germany claiming unemployment benefits dropped by 40k last month, driving the jobless rate to a 16 year low. Inflation was slightly softer but still at lofty levels while Eurozone retail PMI edged higher. Yesterday we said that if oil prices break above $120 a barrel, it will validate the concerns of central bankers around the world who were skeptical of the latest fall in oil prices. We have long said that if there is a Hurricane as intense as the Rita, which was a Category 3, oil prices could pick once again and pick up quickly. The Eurozone economic calendar is relatively heavy tomorrow with the unemployment rate, consumer price estimate and confidence numbers due for release. If the EUR/USD manages to close above 1.48, we could be in the midst of technical turn in the currency pair. Meanwhile Switzerland also reported employment numbers with the unemployment rate dropping from 2.8 to 2.4 percent in the second quarter. This was a smaller drop than the market expected but still an impressive one. The KoF leading indicators report is due for release tomorrow. Given the drop in the UBS consumption index earlier this week, there is a decent chance that we will see a similar move in the KoF.

UK Data Hits Milestones But Not Good Ones

Another round of weak economic data has come out of the UK and even though they have hit significant milestones, they weren't good ones. Nationwide house prices dropped by 1.9 percent last month, driving the annualized pace of growth to -10.5 percent, the weakest since 1990. The housing market continues to be the sore point of the UK economy. The CBI retail sales index on the other hand hit a 25-year low, raising concerns that we will see a similar drop in the overall retail sales index. The volume of sales in the month of August was the weakest on record according to the latest report from the Confederation of British Industry. Rising prices, slower growth and falling house prices has taken a big bite out of the pocketbooks of UK consumers. Amidst all of these negative reports and dollar strength, the British pound fell to a new 2 year low against the US Dollar. Since the middle of July, the GBP/USD has now fallen more than 1700 pips with virtually no retracement. The currency pair has become extremely oversold and the hesitancy that we have seen today reflects that. However even if there is a bounce, we do not believe that we have seen the end of GBP/USD weakness. UK consumer confidence numbers are due for release tomorrow and we expect them to remain weak.

Canadian GDP Numbers On Tap

There was no cohesive price action in the Australian, New Zealand and Canadian dollars today. The Aussie gained strength, but the Kiwi and loonie edged lower. Although Australian leading indicators continued to fall, a rise in business investment has some traders hopeful that the Australian economy may actually be holding up. There was no economic data from New Zealand but Finance Minister Cullen warned that the country is facing its biggest economic challenge in 20 years. He also added that further interest rate cuts and the personal tax cut will help support growth. The key word is "rate cut." We have long said that the UK or New Zealand will be the next countries to cut interest rates. As for Canada, the current account surplus increased in the second quarter, but that has failed to help the Canadian dollar. Second quarter GDP and growth data for the month of June are expected to tomorrow. Growth should have picked up given a contraction in the month of May.

Japanese Yen Fails to Benefit from Dow Rally

Unsurprisingly, the Japanese Yen crosses including USD/JPY moved to tune of oil prices today. The conflicting move in the bond markets and the comments from Bank of Japan board member Suda highlights the struggles that the Japanese economy is facing at the moment. Suda said that the government shouldn't relax on inflation as price growth is expected to exceed 2 percent for the first time in 10 years. The move in bond prices on the other hand indicates that there continues to be concerns about Japanese growth. These concerns will confirmed or denied by the big batch of Japanese economic data due for release this evening. This includes consumer prices, the jobless rate, retail sales, household spending and industrial production.

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

There are a lot of economic data on the calendar over the next 24 hours. The primary releases that we are watching are the 9:00 GMT Eurozone data (listed in the Euro section of our report) and the 12:30 GMT Canadian GDP reports.

Given the market's focus on Eurozone and Canadian Data, the currency pair that we have our eye on is EUR/CAD. It is trading within our sell zone, which is established using Bollinger Bands. 1.5500 is a key resistance level. Not only is it a former breakdown zone, but also it is also today's high and the first standard deviation Bollinger Band. As long as EUR/CAD does not close above that price level, we are looking for a move down to 1.5260, which is former support.

Kathy Lien
http://www.gftforex.com

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