Kathy Lien is the Managing Director of FX Strategy for BK Asset Management.
- Why Traders Love the Dollar and US Stocks
- Is Euro Headed for 1.30?
- NZD/USD Drops to Fresh 6 Month Lows Ahead of Trade
- CAD: Burger King in Talks to Buy Tim Horton
- AUD: Hit by Drop in Iron Ore and Copper Prices
- Relief Rally in Sterling
- JPY: Kuroda Signals Potential for More Stimulus
Why Traders Love the Dollar and US Stocks
The US Dollar Index rose to its strongest level in 11 months Monday but the big story was the S&P 500, which hit record highs. For the first time ever, the index broke the psychologically significant 2000 mark which may be surprising to some investors because the milestone was reached at a time with lackluster U.S. growth. For example, all of Monday’s U.S. economic reports surprised to the downside. New home sales dropped 2.4%, manufacturing activity in the Dallas region expanded at the slowest level since March and according to Markit Economics, the service sector and economy in general lost momentum in the month of August. This leaves everyone wondering why U.S. assets are so attractive and the answer is because there are no better alternatives. The U.S. economy could be growing at a faster pace but we’re not seeing the same degree of retrenchment that is occurring in Europe and New Zealand. The lack of better alternatives is the main reason why investors are piling into all U.S. assets from stocks and Treasuries to the dollar. Federal Reserve Chairwoman Janet Yellen soothed the doves last week by refraining from talking about the need to change their guidance or backing an earlier rate rise. In doing so, she has the market believing that interest rates will remain low and monetary policy easy for an extended period of time, providing the perfect backdrop for a rally in Treasuries and equities. Durable goods and consumer confidence are scheduled for release tomorrow and while we feel that the dollar can extend its gains, it is also extremely overbought and due for a correction.
Is Euro Headed for 1.30?
Investors continued to sell the euro on the back of weaker economic data and political upheaval in France. By now disappointing Eurozone data should surprise no one. After a decline in factory orders, industrial production, manufacturing activity and investor confidence, everyone anticipated a drop in business sentiment. The German IFO report came in at 106.3 versus 107.1 eyed. This was considerably lower than last month’s reading of 108.00. The Current Assessment was also lower at 111.1 while future expectations declined to 101.7. Escalating tensions with Russia is having a major impact on export activity and with the latest bans on food imports from Russia, further damage is expected. We have a lot of economic data scheduled for release from Germany this week and chances are these reports will reinforce the troubles in the Eurozone’s largest economy and increase the pressure on the European Central Bank to ease. The collapse of the French government also doesn’t help, putting the EUR/USD at risk of further losses. From a fundamental and technical perspective, the currency pair is vulnerable to a decline towards 1.30. Having broken through the 38.2% Fibonacci retracement of the 2012 to 2014 rally at 1.3250, there is now minor support at 1.3200 followed by more significant support at 1.3025, the 50% Fib retracement of the same move. However with speculative short positions at 20-month highs, we do not expect a smooth one-way decline for the EUR/USD.
NZD/USD Drops to Fresh 6 Month Lows Ahead of Trade
All three of the commodity currencies extended their losses on Monday but the New Zealand dollar was hit the hardest. Kiwi fell to a fresh 6-month low versus the greenback ahead of Monday night’s trade balance report. Between the drop in New Zealand’s manufacturing PMI index and the steep decline in dairy prices during the month of July, we have every reason to believe that the country reported its first trade deficit in 9 months. Over the past 4 months the terms of trade has been declining gradually but with dairy prices falling more than 8% at 2 out of 4 auctions in July, the deterioration could be far more significant and this prospect has put additional pressure on NZD/USD. At the same time, according to our colleague Boris Schlossberg “ fears that the infamous web entrepreneur Kim DotCom who is wanted on piracy charges in the US, may be starting to influence the New Zealand election is also affecting the currency. Mr. DotCom’s party has aligned itself with the Maori party and is polling at 5 percentage points – a big enough swing in New Zealand politics that could possibly give the ruling majority to the opposition Labor party. Such a move leftward would no doubt shake up the currency markets, which have been caught by surprise expecting yet another win by the National party that would maintain the economic status quo. With elections coming up on September 20 the scrutiny on the polls will likely increase markedly and so will the volatility in the kiwi, if Mr. Dotcom’s attempts to upend the establishment rule in New Zealand appear to gain momentum over the next few weeks.” The Canadian dollar on the other hand would have probably experienced steeper losses if not for reports that Burger King (NYSE:BKW) is in talks to buy Tim Hortons and plans to move to Canada. If the deal goes through, it would create one of the world’s largest fast food chains with a market value in excess of $18 billion. So far, we haven’t seen a big reaction in CAD/USD but if an official agreement were reached, it would be yet another factor to hamper the currency pair’s ability to break 1.10.
Relief Rally in Sterling
The British pound was the only currency to outperform the U.S. dollar. With no U.K. data on the calendar, sterling bounced from deeply oversold conditions. Unlike last week when there was no shortage of market moving data and event risks, the U.K. calendar is exceedingly quiet this week, providing the perfect backdrop for a relief rally in GBP/USD. According to the CFTC’s IMM report, even with the 4% slide in the currency pair, speculators are net long and not short because of all of the talk about earlier tightening. On Friday at Jackson Hole, BoE Deputy Governor Broadbent said the path of rate rises, will be very different from the past in that it will be gradual and not aggressive. The fact that he is talking about rate rises at all reminds investors which direction the BoE is headed. As we noted on Friday, eventually U.K. data will improve and when it does, the BoE’s bias to tighten will be reinforced by data, providing the perfect backdrop for a strong recovery. However it could be a while before that happens so in the meantime, we expect GBP/USD to rebound up towards 1.67.
JPY: Kuroda Signals Potential for More Stimulus
At the start of the Asian trading session, the Japanese Yen dropped to fresh multi-month lows against the U.S. dollar. More specifically, USD/JPY rose to 104.46 but by the end of North American trade the currency pair gave up all of its gains and settled back below 104. Although USD/JPY managed to make higher highs and higher lows, 104 is a very important area of resistance for the pair and 105 won’t be an easy level to break either. At Jackson Hole, central bank governor Kuroda said the Bank of Japan of will keep monetary policy stimulative until their 2% inflation target is reached. Despite the recent decline in the currency, the Japanese Yen remains too strong for their taste and as a result, the country may need more stimulus according to Kuroda. No Japanese economic data was released overnight but the Cabinet was set to update its monthly economic assessment Monday evening. Small business confidence and producer prices for the service sector were also scheduled for release. With only secondary U.S. data on the calendar, the Yen crosses are vulnerable to a pullback this week.