The markets will still be looking for alternatives to the US currency as underlying confidence in the economy and dollar remains very weak. Nevertheless, it may be increasingly difficult to find attractive investments and this may provide some net dollar protection, especially if there is further speculation over emerging-market capital controls.
Key events for the forthcoming week
Date
|
Time (GMT)
|
Data release/event
|
Tuesday November 24th
|
09.00
|
Germany IFO index
|
Tuesday November 24th
|
19.00
|
US FOMC minutes
|
Dollar:
The recent economic data will maintain expectations of a frail economic recovery with the risk of a renewed downturn during 2010once the fiscal support is removed. Markets will also be expecting short-term interest rates to remain at very low levels which will sap yield support for the dollar. There are also likely to be increased doubts over the global economy which will tend to curb selling pressure. Dollar rally attempts are realistic, but will be constrained by fears over medium-term reserve diversification.
Technical trading tended to dominate for much of the week with markets unable to break relatively narrow ranges. The dollar gained some protection as there was a gradually more cautious attitude towards risk with a 1.4820-1.50 range dominating.
The US housing data was again weaker than expected as starts for October declined to an annual rate of 0.53mn from 0.59mn the previous month while building permits dipped to 0.55mn from 0.58mn and this was the lowest rate since May. The NAHB unchanged at 17 for October following a small downward revision for September.
The industrial production data was also disappointing with the October increase held at 0.1% compared with expectations of a 0.4% monthly increase. The industrial and housing data will increase fears that the economy will find it very difficult to secure a sustained recovery.
The Philadelphia Fed index was stronger than expected with a further increase in the headline index to 16.7 from 11.5 the previous month. The employment component remained negative, but was at the highest level for over 12 months.
Elsewhere, jobless claims were unchanged at 505,000 in the latest week which continues to suggest a slow improvement in the labour market even though job creation remains very weak. The net impact of the data was some slight reassurance with risk appetite looking to stabilise.
As far as inflation is concerned, there was a 0.3% increase in consumer prices for October while core prices rose 0.2% for the month. Headline prices fell 0.2% over the year, but this was much less than the 1.3% decline seen the previous month and the low point for inflation has clearly passed which will complicate the Fed’s task.
Regional Fed Governor Bullard stated on Wednesday that based on previous economic cycles it was possible that the Fed will not start raising interest rates until 2012, although he also warned over the risk of leaving interest rates for too low for too long given the risk of asset-price bubbles developing. Bullard is an FOMC voting member during 2010 and the comments reinforced market expectations that short-term interest rates will remain at very low levels over the next few months.
The headline US retail sales data was slightly stronger than expected with a 1.4% increase for October. The September data was revised weaker to show a 2.3% decline while the core data was also slightly weaker than expected. There were further doubts over the strength of consumer spending as underlying stresses persist.
Fed Chairman Bernanke stated on Monday that the central bank would pay close attention to the implications of changes in the value of the dollar. This was a fairly forthright comment from Bernanke and does signal increased Fed and Administration unease over the dollar’s value. The US currency made initial gains, but could not sustain the advance. Bernanke also remained cautious over the economy and repeated comments that interest rates would stay low for a prolonged period. |