The U.S. dollar dropped slightly against its majors early Tuesday, as data yesterday did not support the currency to continue last week’s rally. New home sales in the U.S. fell to a one-year low last month after two months of gains to contradict the upbeat figures seen in housing starts and pending home sales reported lately. Moreover, U.S. bond yields continued to drop across the curve indicating that fixed income traders are not convinced that the fed is likely to move towards normalizing monetary policy on Wednesday.
Looking into earnings, almost 70% of U.S. firms managed to beat Wall Street expectations, a number that looks encouraging, but it is misleading as the bar has been set low in terms of expectations. Corporate America is facing profit recession with consensus for Q3 earning per share down 2.8% from last year and profit margins fallen below 10% for the first time since 2010. Around two third of companies blamed drop in profits to the U.S. dollar strength and we can see the impact on broader economic indicators like exports and manufacturing. The Fed is in a difficult situation as policy makers were signalling monetary policy normalization but recent data do not support, with CPI at zero levels, manufacturing dropping, job growth slowing and a U.S. dollar strength would only add more pressure. U.S. bulls are looking for a signal from the FOMC but they are unlikely to get one on Wednesday, which will cause short covering positions for majors against the dollar. However; loses in the dollar will create an opportunity for the bulls as divergence between the U.S. and other major central banks will resume in the longer term.
On the data front, durable goods, consumer confidence, CaseShiller House Prices and Markit PMIs are due to release, with durable goods most likely to have a larger impact on the dollar.
The Pound has been very quiet, trading within a 27 pips range against the US dollar as traders await the preliminary reading of third quarter GDP due to release at 9:30 GMT. Industrial report released yesterday showed there has been a slowdown in manufacturing, and production levels fell in the past three months for the first time in two years. These figures might have an impact on GDP growth, however if the number came below the expected 0.6% QoQ the GBPUSD could break below 1.53 support level.
In commodity currencies, the Kiwi is a very interesting trade as it has been the top performing currency against the G10 with NZDUSD up more than 6% in October, which is against RBNZ will. The Reserve Bank of New Zealand is expected to hold rates on Thursday after three straight cuts in interest rates. However policy makers should be worried after the country’s trade deficit hit a 12-month high, with dairy being the biggest drag on the figure. The central bank is watching FOMC meeting very closely and if the Fed did not manage to strengthen the dollar we expect at least a verbal intervention from RBNZ to downplay the currency as pressure is already mounting to deliver more easing.
After falling more than 300 pips within 48 hours last week, the EURUSD is trying to defend 1.10 levels. Yesterday’s German’s IFO business climate came better than expected and recent and PMI’s from Friday lent some support to the single currency. Today’s Eurozone calendar is empty and expect the range bound trading to resume until U.S. data gets released later in the day.