The U.S. currency had another week of declines against its major peers, with commodity currencies being the biggest winners.
Pressure on the dollar was predominantly based on beliefs that the Fed will not make the move for hiking rates in 2016. However, there is a clear disagreement between what investors and economists/officials believe, as markets continue to price the first hike in March 2016, 64% of economists surveyed by WSJ say the Fed’s December meeting will culminate with the first rate rise in nearly a decade. Dennis Lockhart, President of the Federal Reserve Bank of Atlanta, said a hike from current near-zero levels is likely to happen in either the October or December meetings and he believes that the economy remains on satisfactory track but the situation calls for especially diligent monitoring of incoming data with particular attention to consumer activity.
As Lockhart and other Fed members want to monitor data, so shall we. Two important economic releases worth watching closely this week are retail sales and inflation. On Wednesday U.S. consumers will prove if they are in good shape and recent employment figures did not scare them out. Economists expect the headline figure to post a 0.1% increase in September and excluding gasoline and automobiles to increase by 0.3%. Thursday we will turn our focus to prices as deflationary fears continue to persist with U.S. consumer price index projected to decline 0.2% in September, but excluding food and energy economists are looking for a 0.1% gain. If those two figures beat expectations, we expect the dollar to reverse recent losses and would be an opportunity for dollar bulls looking for an entry point.
The inverse relation between the Euro and equity markets broke last week, with both enjoying a relief rally. EURUSD hit 1.1387 a level last seen in 18 September and traders are questioning the strength of the rally, whether it is a sustainable one and how far can it go? Well, let us look into the facts! Latest Economic releases indicate that Europe’s largest economy is not in a good condition. Germany’s factory orders dropped by 1.8%, industrial production plunged to Aug 2014 lows and exports at worst levels since the crisis. If we add the Volkswagen emissions scandal the picture just looks uglier. On the other side, ECB policy markers expressed their concerns about inflation and general economic outlook with worries from EM in its latest policy meeting accounts. Voices for expanding QE in Euro area are also turning higher and we believe that eventually we will see QE’s modified version, which again brings the discussion of divergence in monetary policy between ECB and Fed. German ZEW is the only piece of currency moving indicator to be released and do not expect higher confidence with recent disappointing economic figures. The bottom line is, if the U.S. did not surprise to the downside, any rally towards EURUSD 1.14 – 1.15 would be an opportunity to short the pair.
The Cable is another interesting currency to watch as recent range trading range broke out. After GBPUSD broke above 1.53 on Wednesday, the pair managed to stay above that level. Economic data were not of great support with services PMI dropping to two and a half years low and yet BoE’s Carney continues to warn that wage pressures might lead to a rate hike and that the Bank is not Fed-dependent. Carney’s statement provided additional push to the pound, and whether we should believe him or the economic data releases hinges upon next week’s inflation and labor numbers. Tuesday Consumer Prices and Wednesday Employment figures are key numbers for cables next move. A surprise to the upside could lead the GBPUSD to test 1.56 in the short term.
Commodity currencies were the stars of last week’s trading, with Aussie enjoying its strongest week since 2012 and Kiwi hitting 10 weeks high. Gold, oil, iron ore and other major commodity prices along with accommodative monetary policies were the catalysts of the rally. Chinese trade balance and Australian employment numbers next week will either confirm the Aussie’s reversal or put a cap on further inclines.