- The dollar traded mostly higher on Monday despite a US equity market rally. Stocks rose for the first day in five. The S&P 500 climbed 18.60 points to 1,062.98. The USD/JPY recovered overnight losses after Japan's Finance Minister Hirohisa Fujii, who opposes intervening in the currency markets, stated that he is carefully monitoring the strengthening yen and stable currency moves are desirable. The euro declined after European Central Bank President Jean-Claude Trichet said the solidity of the dollar is important. Sterling fell for a fourth day despite increasing UK home prices. The Australian dollar rose on Reserve Bank of Australia Governor Glenn Stevens' hawkish comment that adjustments to interest rates shall be timely and ahead of a build-up of imbalances that would occur if interest rates were kept low for too long. The Canadian dollar gained as energy prices advanced.
- The dollar index rose, supported by ECB President Trichet's assertion that a strong dollar is extremely important for the world economy and it is too early for the ECB to unwind emergency stimulus measures. Interestingly, the dollar index gained despite higher equity prices. This could be a new development. We are closely monitoring this week's employment report. Better-than-expected employment figures may lead to speculation that US interest rates could rise faster than international ones, which in turn could be the end of risk aversion trades and the beginning of a period when the greenback can rally on good news. The dollar index is between important support at the 76 handle and resistance from its downtrend in the 77.50 area. A break of either direction will signal the future USD outlook.
Financial and Economic News and Comments
US & Canada
- The Chicago Fed national activity index declined to -0.90 in August from an upwardly revised -0.56 in July, indicating overall economic activity was lower, the Federal Reserve Bank of Chicago said. Three of the four index components made negative contributions while the production and income category made a positive contribution for a second straight month. The 3-month moving average improved for a seventh consecutive month in August, increasing to -1.09 from July's -1.61.
- The Dallas Fed general business activity index increased to -6.4 in September from -9.1 in August, indicating Texas factory activity showed the first signs of bottoming out, the Federal Reserve Bank of Dallas said in the September Texas manufacturing outlook survey. Most indexes of current activity improved, continuing a trend that began in spring, the Dallas Fed said, asserting that manufacturers continue to expect demand to improve in coming months. The 6-month-from-now general business activity index remained positive for a second consecutive month, at 13.9 in the September survey following August's 16.8. The 6-month company outlook was at 16.9 in September, having been positive since June.
- Germany's consumer prices fell faster than forecast, falling 0.4% m/m in September after a 0.2% m/m increase in August, preliminary CPI data from the Federal Statistical Office showed. September CPI declined 0.3% y/y after being flat y/y the month earlier. The EU harmonized CPI for Germany fell at a faster pace in September, falling 0.4% m/m and 0.4% y/y.
- UK house prices rose 0.2% m/m in September to £156,100 ($248,400), the largest gain since June 2007, after a 0.1% m/m increase in August, Hometrack Ltd. reported. September house prices fell 5.6% y/y, the smallest year-on-year fall since August 2008, easing the pace of decline from August's 6.7% y/y slide.
- As Australia's economy is recovering, government stimulus spending will need to be eased and interest rates increased, Reserve Bank of Australia Governor Glenn Stevens said in testimony to the Senate Economics References Committee. Australia has done quite well on this occasion, Stevens said to the committee. In due course, both fiscal and monetary support will need to be unwound as private demand increases, he said, adding that the RBA has already signalled that interest rates can be expected, at some point, to move off their current unusually low levels, as recovery proceeds. Adjustments to interest rates shall be timely and ahead of a build-up of imbalances that would occur if interest rates were kept low for too long, Stevens said.
FX Strategy Update