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- British Pound Tumbles as Widening UK Fiscal Deficits Add to Credit Downgrade Concerns
- Euro Mostly Stronger as German Producer Prices, Italian Industrial Output Improve
- New Zealand Dollar Outlook Dependent Upon Q2 GDP Report
US Dollar Bounces as S&P 500 Fails to Break Recent Spike Highs
The US dollar regained its footing on Friday, gaining against all of the majors after hitting fresh 2009 lows yesterday. Looking at some other asset classes, commodities fell across the board, Treasuries took a hit and 10-year yields rose 8 basis points to 3.463 percent, while US equities failed to break above yesterday's spike highs as the S&P 500 closed up 2.8 points at 1068.30. All told, after experiencing very extensive moves over the past two weeks, it looks like assets like equities and the US dollar (DXY) index may experience a bit of a consolidation period near their recent highs and lows.
The major piece of event risk for the US dollar next week will come on Wednesday at 14:15 ET, when the Federal Open Market Committee (FOMC) is widely expected to leave the fed funds target range at 0.0 percent - 0.25 percent. The FOMC started saying in January that they continue to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time, and they're likely to repeat this phrase once again. Furthermore, the last statement highlighted that the Committee's policy focus is to support the functioning of financial markets via quantitative easing (QE) and other measures that are likely to keep the size of the Federal Reserve's balance sheet at a high level. Such statements have historically been bearish for the US dollar, but the statement ultimately shouldn't ignite significant volatility unless the FOMC announces a change to their QE program or starts to signal a bullish bias for interest rates down the line.
British Pound Tumbles as Widening UK Fiscal Deficits Add to Credit Downgrade Concerns
The British pound was easily the weakest of the majors on Friday, and for that matter, the entire week as the currency fell more than 3 percent against the euro, Swiss franc, Canadian dollar, and Australian dollar. While some indicators from the nation have shown signs of improvement, fiscal data has done nothing but deteriorate, adding pressure on the British pound. In fact, public sector net borrowing in the UK jumped a whopping 16.1 billion pounds during August as income tax receipts fell 13 percent from a year ago. Even worse, the deficit reached 127 billion pounds in August from a year ago, and the steady rise suggests that the shortfall may breach Chancellor of the Exchequer Alistair Darling's full-year forecasts for a deficit of 175 billion pounds.
According to the Financial Times, the corrosion of the UK's fiscal state has been a result more of a collapse in revenues - total tax receipts have fallen by 11.4 percent so far this financial year compared with a year earlier - than of a jump in spending of just 5.3 percent this year. The further the UK's fiscal state deteriorates, the greater the risk will grow that ratings agencies will question if the nation deserves the golden AAA credit rating, especially after Standard & Poor's downgraded the UK's credit outlook to negative from stable because of their budget woes. Nevertheless, Standard & Poor's has also said that they would reserve any judgment on potential downgrades until the next general election, which may be held in May or early-June 2010. On the downside, this leaves a long period of time open for speculation on the prospects for the UK's credit rating to reign supreme, which made make the already-volatile British pound even choppier.
Euro Mostly Stronger as German Producer Prices, Italian Industrial Output Improve
The euro held its own, for the most part, on Thursday as the currency only slipped against the US dollar and Swiss franc. Economic data from the region was mostly stronger-than-expected, as German producer prices rose 0.5 percent in August thanks to an increase in oil costs, indicating that there may be some impetus building for CPI to return to positive levels. Meanwhile, Italian industrial orders and sales both gained in July, suggesting that emerging growth in the rest of the Euro-zone is starting to aid more export-dependent economies.
Looking ahead to next week, a steady rally in European equities though July and September to the highest levels since October 2008 along with indications of burgeoning economic growth in Germany is likely to underpin the case for a rise in German business sentiment for the month of September. On Thursday, the IFO survey on the business climate is projected to rise to a one-year high of 92.0 from 90.5, led by rising expectations and mild increases in sentiment on currency conditions. Surprisingly strong results could lead the euro to gain following the news on a very short-term basis, but disappointing data would likely have a greater impact, and could trigger sharp declines in the currency.
New Zealand Dollar Outlook Dependent Upon Q2 GDP Report
The New Zealand dollar was the strongest of the commodity dollars on Friday, though NZDUSD backed down from its 2009 highs yet again. The overall resilience of the New Zealand dollar may hinge upon a major release next week: GDP. Upcoming GDP reports are anticipated to show that the New Zealand economy contracted for the sixth straight quarter during Q2, albeit at the slowest pace since the start of the recession. Quarterly GDP is projected to fall by 0.2 percent, compared to a drop of 1 percent in Q1, while the annual rate is projected to rise to -2.6 percent from -2.7 percent. Leading indicators show that the New Zealand economy has continued to feel the impact of the global slowdown and decline in exports, as manufacturing activity slumped 4.8 percent in Q2. On the other hand, retail sales rose through much of the quarter despite a rise in the unemployment rate to a 9-year high of 6.0 percent from 5.0 percent. As it stands, Credit Suisse overnight index swaps are pricing in a 126 basis points worth of hikes by the Reserve Bank of New Zealand over the next 12 months - the most since at least 2006 - but if New Zealand GDP falls more than expected, expectations could reverse and weigh on the New Zealand dollar. However, surprisingly strong readings have the potential to push NZDUSD to fresh 2009 highs.
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