U.S. DOLLAR: LATE DAY ACTION
The last hour of trading was by far the most frantic as stock gains disappeared almost instantaneously thanks to a barrage of economic concerns. The Dow finished the day down more than 90 points after reaching a new high above the 10,100 level. The dollar received a quick burst of buying as a result; taking a notch out of what was substantial weakness. However, even the combination of a disappointing Beige Book and comments from Larry Summers indicating that he stands behind a strong dollar could not reverse dollar losses entirely. In fact, today was another momentous day for selling the greenback. EUR/USD, in particular, penetrated the critical 1.50 level to reach a new high. Meanwhile, the pound finally started to join the action, posting a sizable 200 pip advance against the dollar. The kiwi was also a strong performer today and broke through to a new fifteen month high. The evidence of dollar weakness is even more substantial in light of the fact that rallies did not falter in the face of a complete reversal in stocks.
A Bleak Beige Book
Today’s release of the Federal Reserve’s Beige Book, which analyzes economic conditions across the Fed’s 12 districts, left little to get excited about. Stock market rallies did not fare well in light of an economy that does not look as upbeat as everyone had hoped. The Fed notes that even when they saw improvement, it was “either small or scattered.” They did give credit to residential real estate and manufacturing for its improvement over the summer, but there was far too much cause for concern to signal any change in monetary policy would be required. The Fed indicated that the worst performing sector by far was commercial real estate, which weakened across all regions. The report also brought the weakness in the labor market back into market consciousness. Consumer spending as a result was mixed as job uncertainties continue to curtail expenditures. The list of problem spots goes on with continued softness in the financial services industry followed by little to no increase in prices. Even though the Fed indicated that all districts reported “stabilization or modest improvement,” the question is whether or not we can expect a sustainable return to growth in the third quarter with these weak spots. It is possible, that as fiscal stimulus starts to unwind the economy could hit a wall like what the Beige Book seemed to demonstrate. In any event, today’s release was a real wakeup call that indicated that we are not as far along the road of recovery as expected.
Quiet Week to Come
The remainder of this week is poised to be a lull in the action for U.S. economic data. Only the Leading Indicators report and the House Price Index are expected to come for tomorrow. That leaves Existing Home Sales as the only report to wrap up the week on Friday.
USD/JPY: TRADE NUMBERS SHOULD REFLECT YEN STRENGTH
USD/JPY shows continued uncertainty as it has held motionless for the last four trading days. The pair has clearly been confused by the latest barrage of comments that have yielded the threat of intervention in absolute ambiguity. There has been no data from Japan today but we are waiting on the Trade Balance to answer some questions for tonight. The one thing the release might be able to clear up is whether the persistent yen strength is starting to have a noticeable effect on the country’s exports. Judging by the fact that many key Japanese firms have stepped forward and warned about the damage the yen has wrecked, this may very well be the case. Another upcoming event risk for Japan will be a string of key economic data coming from China. Within the next couple of days, China will produce both GDP and Industrial Production figures that will not only impact Japan, but the entire Asian continent. Since the country is the predominant driver of growth across the region, disappointing figures could indicate that Japan will be having an even harder time finding a buyer for its exports.
May The Force Be With You.
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