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A Surprise in Store for the Dollar?

by: Kathy Lien July 11, 2008 | about stocks: BNZ / ERO / EU / FXA / FXB / FXC / FXE / FXY / GBB / JYF / JYN / UDN / UUP    

Kathy Lien

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The currency market was fairly quiet yesterday with the US dollar rallying against some currencies and falling against others.

Jobless claims were the only piece of data released, and filings for unemployment dropped by 58k to the lowest level in 3 months. The goods news however was shrugged off by the markets because the data is distorted by seasonal shutdowns in auto plants. This happens every summer in the month of July and lasts for about two weeks. According to the Labor department, their seasonal adjustment formula prices in auto layoffs in the first 2 weeks of July and fewer occurred last week than expected. Excluding the seasonal adjustment, claims actually increased by 30k while continuing claims rose by 91k.

With companies such as Starbucks (SBUX), Citigroup (C) and Air Tran (AAI) announcing layoffs in the past month, the labor market will worsen before it improves. Despite the bad news, the US dollar may be in for a big surprise.

A difficult labor market, the decline in the stock market and the rise in food and energy prices are expected to force US consumers to reduce spending. However, judging from the monthly reports from retailers, consumer spending may not be that bad. Discounters like Wal-Mart (WMT), Costco (COST) and Target (TGT) all reported stronger sales in the month of June as consumers continue to spend their tax rebates. If retail sales remain positive, the US economy may avoid double dipping, which would be a nice surprise for the US dollar.

Fannie Mae (FNM) and Freddie Mac (FRE)’s potential solvency problems were the biggest news in the financial markets Thursday. They are too big to fail and we believe that the US government will exhaust its options before allowing this to happen, because preventing or mitigating future crisis is Bernanke and Paulson’s top priority. Fed President Yellen even said today that the Fed has the potential to further ramp up facilities if needed. Meanwhile the US trade balance and consumer confidence reports are due for release tomorrow. The rise in the export component of the manufacturing ISM report suggests that the trade balance will improve, but any dollar rally could be offset by the consumer confidence report which will be released shortly thereafter. More strain on the US economy should lead to weaker consumer confidence.

Eurozone Growth Continues to Slow

The Euro strengthened against the US dollar but that does not correctly reflect the outlook for the Eurozone economy. French and Italian industrial production both dropped significantly in the month of May, which is consistent with the decline that has already been reported in Germany and Spain. Based upon these numbers, GDP should have remained unchanged in the second quarter, which compares to the 0.7 percent growth reported in Q1. The Eurozone economy is undoubtedly struggling and the catalyst that will break the EUR/USD out of its current range is evidence that one economy (the US or the Eurozone) is deteriorating much faster than the other. This could very well be the Eurozone, which is only beginning to suffer. There will be no Eurozone economic data due for release tomorrow, which means that the price action of the currency pair will depend upon US data and the fluctuations in the Dow.

Bank of England Meeting: A Big Yawn

The Bank of England meeting was a big yawn as interest rates were left unchanged at 5 percent.  The lack of a surprise statement or a rate cut came as a relief to some pound traders who were hoping for the impossible – a proactive move by the BoE. Historically, the BoE has been a very dynamic central bank that keeps the market guessing, but after Mervyn King fell behind the curve in responding to the credit crunch in August 2007, he hasn’t quite caught up. The British pound did end the day lower against the Euro and US dollar, but that was largely due to selling at the London open.  The UK housing market continues to be the Achilles Heel of the UK economy. Mortgage lender Halifax report a 6 percent drop in house prices compared to a year ago, which translates into a 2 percent drop from the pervious month. Similar to the conditions in NY, the housing market is closely tied to the labor market. When the layoffs in financial sector finally hit, the housing market could deteriorate even further. 

Australian Dollar Rises on Stronger Employment Numbers; Next Up is the Canadian Dollar

The best performing currencies Thursday were the Canadian, New Zealand and Australian dollars. Despite the drop in the employment component of the service and manufacturing PMI report, job growth in Australia increased more than expected in the month of June. The 29k rise completely reversed the 25k drop from the previous month. Although the Australian labor market is in far better shape than the labor market in the US, the sharp jump is partially attributed to a smaller sample size. Canada will be releasing employment numbers tomorrow. Consumer confidence has been plummeting, but the sharp rise in the IVEY PMI report suggests that traders should not rule out good numbers. Finally, the New Zealand dollar is higher despite a decline in the business PMI index. 

Japanese Yen Crosses Rebound Despite Volatility in US Stocks

The Japanese Yen crosses continue to be at whim of the US stock market. The Dow was up more than 100 points after lunchtime in NY but then reversed all of those gains to hit a low of 11086.95 (-62 for the day) before ending up 81 points. This type of rollercoaster ride is something traders have unwillingly grown accustomed to this past week as 100 point swings in either direction become the norm. The CGPI index, trade and current account balances were better than expected, but as we have suggested, these numbers had little impact on the Yen. Consumer confidence is due for release tonight and they should be weak, just like the Eco Watchers survey.

(Click charts to enlarge.)

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This article has 13 comments:

  •  
    Jul 11 08:42 AM
    Somebody, please stop publishing her permabull BS
    Lien there is know surprise for dollar. Take you loss and move on.

    Dollar is less than 1% from lows. It's going to break down any moment

    Reply
  •  
    Jul 11 08:50 AM
    I dont care how many books she has written, this author's articles lately are nonsense.

    Has been completely wrong about the USD. And she just wrote 2 days ago how oil would definitely fall $10 to $125 - instead its up more than $10.

    Please, please, buy my dollars and sell me your gold and oil.

    Reply
  •  
    Jul 11 09:02 AM
    it's also just factually incorrect - the dollar got crushed when oil popped yesterday.
    Reply
  •  
    Jul 11 09:11 AM
    The U.S. dollar may be in for a big surprise? Which way? The tone and context intimates a movement up, but she noticeably didn't pick a direction.

    I've been following Ms. Lien's columns for a few months now and she has been dead wrong on many of her past currency predictions. That being said, at least Ms. Lien is learning to phrase her prognostications in vague astrological generalities that give her a better shot at being right.

    Her past calls on currency movements have been about as close to a contrary indicator as I've come across. With that in mind, here's my prediction based solely on the newly established "Lien Contrary Indicator": no surprises are in store for the U.S. Dollar in the short term.
    Reply
  •  
    Jul 11 11:00 AM
    "Discounters like Wal-Mart (WMT), Costco (COST) and Target (TGT) all reported stronger sales in the month of June as consumers continue to spend their tax rebates. If retail sales remain positive, the US economy may avoid double dipping, which would be a nice surprise for the US dollar."

    Are they sending out another welfare cheque?
    Reply
  •  
    Jul 11 12:57 PM
    What I love about days like today is how no one is paying attention to a rapidly deteriorating situation in the euro-zone.

    As Ms. Lien correctly points out.....French, Italian (and Germany) all showed pronounced weakness in their industrial output for May and there is every indication that the euro-zone may have contracted in the 2nd qtr. (As a reminder...the U.S. hasn't experienced negative growth yet).

    Too boot, Mr. Trichet has indicated that he is willing to tolerate a flaring up of inflation in the short-term to see it moderate in the medium term (early to mid-09). IMO as the fundamentals continue to deteriorate in the euro-zone, traders will begin to "price-out" further rate increases and the euro will fall in value.

    IMO the greenback appreciating against the euro will be less a reflection of dollar strength as much as it will be a reflection of the euro losing value against other currencies.

    It's a contrarian play and a bit dicey but I think a trader could make a very good case for shorting EUR/USD from the 1.59 - 1.60 handles.

    Good work Ms. Lien.
    Reply
  •  
    Jul 11 11:45 PM
    the euro zone is no where near as weak as the us right now.. it may be in the future and that will be the time to buy USD right now its hard to see how EUR wont be 1.7 real by xmas or worse.....

    only intervention will change fundamentals and even then not for long....

    sad to watch for the global economy

    Reply
  •  
    Jul 12 11:51 AM
    Ms. Lien is smoking some mean stuff! I mean she must really be 420 friendly. Nie shwo go-pee Ms. Lien.
    Reply
  •  
    Jul 12 02:13 PM
    I quit reading DailyFX (Kathy Lien's main hangout) because of exactly this kind of article. Catchy headline, a bunch of random nothingness, no useful value.
    Reply
  •  
    Jul 12 03:54 PM
    I don't get it. This author and many others keep talking about a dollar upraise. It never happens. Why do they keep on saying it? One has to start saying there is something going on here. What?
    Reply
  •  
    Jul 13 01:37 PM
    There was nothing disagreeable in this article. You shouldn't try to trade off of an authors articles maybe that's your mistake for looking for a free ride.
    Reply
  •  
    Jul 13 04:57 PM
    The US manipulates their inflation data (CPI) and this masks the reality of negative GDP. The BLS has become the "Ministry of Truth". Even this heavily massaged data is going to show a CPI gain of +.7% this week. The PPI is expected to be +1.3%. Meanwhile, FRE and FNM are in deep trouble. They have over 1.5 trillion in direct debt. Freddie is ``insolvent'' under fair value accounting rules, according to former St. Louis Federal Reserve President William Poole. LEH fell 40% last week. What happens if they go under? Throw in Indymac causing loss of confidence in the banking system and one could conclude that the dollar is in deep trouble. Gold blew through 960 Friday. Crude is almost to 150. Let's see what kind of "surprise" the fed and treasury can script.
    Reply
  •  
    Jul 14 09:42 AM
    With all due respect Kathy, whatever they are paying you is too much. You are focusing on short term trends and you seem unaware of the the monster secular trends shredding the value of the dollar which are so obvious as to not bear mentioning. Until the government starts to defend the dollar,it's value will decline. The only thing which slow its demise is if the other countries start to flush their currencies down the toilet.
    Reply
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