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• Japanese Yen Domination Highlights Lingering Risk Aversion as Equities, Carry Trades, Commodities Fall
• British Pound Gains as UK Input Prices Rise by Most Since June 2008
• Euro Little Changed Despite Hawkish ECB Comments
US Dollar Under Pressure Despite Rise in US Consumer Confidence, Wholesale Sales
The US dollar ended Friday on mixed note, as a more than 1 percent decline against the Japanese yen generally put the currency under pressure versus the rest of the majors. US economic news was generally better-than-expected, as the University of Michigan's preliminary reading of consumer confidence jumped to a 3-month high of 70.2 in September from 65.7 in August. A breakdown shows improvements in sentiment on both current economic conditions and the economic outlook, which differs greatly from the previous month, when the current conditions component dove to a 5-month low. That said, the final reading of the survey isn't due out until September 25, and it is highly prone to revisions. Meanwhile, wholesale sales rose for the third straight month in July at a rate of 0.5 percent, and combined with a 1.4 percent drop in inventories, the inventory/sales ratio slipped to 1.23, the lowest since October 2008, from 1.25. Overall, this indicates that rising domestic demand is helping to eliminate the excess supplies piled up in wholesaler stock rooms. On the inflation front, the US import price index rose 2 percent in August, which brought the annual rate up to -15.0 percent from a record low of -19.2 percent, and suggests that next week's release of the US consumer price index (CPI) could show similar buoyancy.
In addition to CPI, the US dollar will face big event risk on Tuesday as the Commerce Department is forecasted to report that US retail sales jumped 1.8 percent in August, which would mark the biggest monthly rise since January 2006, led by increased auto and gas station sales. Indeed, as the deadline for the cash for clunkers program neared on August 24, eligible buyers likely rushed to take advantage of the deal. Furthermore, this index is not adjusted for inflation, so the steady rise in average gasoline prices during the month should contribute to overall gains. That said, excluding items like autos and gas, advance retail sales are projected to edge only 0.1 percent higher, following 5 consecutive months of contraction, but there may be even greater upside potential due to back to school shopping. Measures of consumption could start to deteriorate once again in September, though, as the impact of the cash for clunkers program fades and as unemployment continues its steady ascent. Nevertheless, if the August reading of US advance retail sales reflects strong results, the US dollar could rally in response.
Related Article: US Dollar, Swiss Franc Trade to Remain Choppy on US Retail Sales, SNB Meeting
Japanese Yen Domination Highlights Lingering Risk Aversion as Equities, Carry Trades, Commodities Fall
The Japanese yen surged 1 percent or more across the majors, with the sharpest moves reflected in the commodity-sensitive AUDJPY and CADJPY as crude oil futures settled down 3.7 percent at $69.29/bbl. The concurrent 22 point loss in the Dow Jones Industrial Average suggests that risk aversion was in play, but it has been made apparent that the US dollar isn't really trading as a safe-haven asset, which has allowed greenback and Japanese yen price action to diverge. As a result, USDJPY has taken a substantial hit in recent days and closed down at the lowest levels since February, and according to Technical Strategist Jamie Saettele, USDJPY could ultimately target the 2009 low of 87.10.
Related Article: Risk Appetite Buoyant in Currencies and Stocks, Yet Momentum Still Lacks Across the Board
British Pound Gains as UK Input Prices Rise by Most Since June 2008
The British pound held its own against the majors, for the most part, and only fell against the New Zealand dollar and the ultra-strong Japanese yen. UK fundamentals worked in favor of the currency, as the output producer price index (PPI) rose for a sixth month in August at a rate of 0.2 percent, while the input PPI surged 2.2 percent during the same period, marking the sharpest increase since June 2008. The gains helped to moderate the year-over-year readings, with the annual rate of output PPI up to -0.4 percent from -1.3 percent and input PPI up to -7.5 percent from a nearly 23-year low of -12.2 percent. The data creates some upside risks for next Tuesday's release of the UK's consumer price index (CPI) for the month of August, which is expected to rise 0.3 percent. The more important part of this report is that the annual rate of growth, which is more closely watched by the Bank of England, is forecasted to fall to 1.4 percent, the lowest since October 2004, from 1.8 percent, keeping inflation within the central bank's acceptable range of 1 percent - 3 percent, but below their 2 percent target. If CPI falls more than projected, the British pound could pull back sharply as the markets will anticipate that the BOE will expand their quantitative easing efforts even further before year-end. On the other hand, if CPI holds strong, the currency could rally in response.
Euro Little Changed Despite Hawkish ECB Comments
The euro was little changed on Friday, moving 0.1 percent or less against most of the majors, but falling 1.2 percent against the Japanese yen, despite hawkish comments from European Central Bank Executive Board member Lorenzo Bini Smaghi. Smaghi said during a speech that the ECB can't wait to raise interest rates before inflation materializes but will have to precede it. especially because of the very low level to which interest rates have been reduced. Nevertheless, he said that it is not yet the time to withdraw stimulus measures and that it would be inappropriate to commit to any specific path ex ante. Meanwhile, the ECB's Monthly Report reiterated several of the comments that were made by ECB President Jean-Claude Trichet after their most recent policy meeting, as it said that the central bank believes the contraction has come to an end but that a recovery will be gradual and uneven.
Written by: Terri Belkas, Currency Strategist for DailyFX.com