- The dollar fell versus its counterparts on Tuesday as risk appetite returned after the Asian Development Bank said China and non-Japan Asia will expand faster than earlier expected. The Federal Reserve is unlikely to signal any tightening of its monetary stance when concluding its meeting tomorrow despite a probable upgrade of its US economic outlook. The S&P 500 rose 7.00 points to 1,071.66. The yen and pound rose for the first day in four, while the euro reached a new yearly high. The Australian and Canadian dollars climbed as commodity prices advanced.
- Continuing its negative correlation with the US stock market, the dollar index fell to 76.06, just above the vital 76-support. There is an equally important resistance in the 78 area. We are closely watching these technical levels as a penetration will likely lead to a large move for the dollar. A break of the resistance would be a strong bullish signal while a penetration of the support would indicate a continuation of the dollar's long slump.
Financial and Economic News and Comments
US & Canada
- The Federal Reserve is expected to maintain the target range for the federal funds rate at 0 to 0.25% this Wednesday. The Fed has a dual mandate of promoting maximum employment and price stability. If history is any guide, the FOMC is unlikely to raise rates anytime soon. In the chart below, green dotted vertical lines show the time when the federal funds rate was raised. The only time the Fed hiked rates quickly was after the 1980 recession and that hike led to a double dip recession. In all the other instances, the Fed waited more than a year after recessions ended before raising rates. When the Fed finally hiked rates, employment had expanded for several months, and in all except the 1994 rate hike, inflation was also accelerating.
- US home prices grew a slightly less-than-expected 0.3% m/m in July after a downwardly revised 0.1% m/m increase in June, according to the Federal Housing Finance Agency's monthly house price index. July house prices fell 4.2% y/y, the smallest fall this year.
- The Richmond Fed manufacturing index held steady at 14 in September, indicating manufacturing activity in the central Atlantic region grew for a fifth consecutive month, the latest survey by the Federal Reserve Bank of Richmond showed, signaling a strong Q3. Shipments increased to 22 in September from 21 in August. The jobs index improved to 5 from 0, indicating manufacturers saw their first increase in worker numbers since December 2007. New orders declined to 13 from 18, still in positive territory. Business prospects for the next six months were also generally more positive, the Richmond Fed said.
- Canada's retail sales unexpectedly declined 0.6% m/m to C$34.179 billion ($31.97 billion) in July, reflecting lower prices at gasoline stations, after a 1.0% m/m increase in June, according to figures from Statistics Canada. Retail sales less autos unexpectedly fell 0.8% m/m, following June's upwardly revised 1.1% m/m advance. July retail sales fell 4.9% y/y and fell 4.7% y/y excluding autos.
- Switzerland's trade surplus narrowed to CHF1.79 billion ($1.75 billion) in August from a downwardly revised CHF2.21 billion in July, the Swiss Federal Customs Administration said. Exports increased 2.0% m/m in August after an upwardly revised 4.2% m/m gain in July, while imports fell 2.5% m/m following July's upwardly revised 1.1% m/m decline.
- Switzerland's GDP will decline 1.7% during 2009, the State Secretariat for Economic Affairs (SECO) said, raising its forecast from a previously estimated 2.7% contraction. The economy will grow a modest 0.4% in 2010, revised up from a previously estimated 0.4% decline. Prospects for the labour market remain bleak, the SECO said, forecasting that the Swiss unemployment rate will rise from an annual average of 3.8% this year to 5.2% next year.
- New Zealand's actual current account balance was a surplus of NZ$124 million ($89.4 million) in Q2 2009, Statistics New Zealand said, yet noting that if the effect of the company tax transaction affecting investment income were removed, there would be a deficit of $537 million. The current account deficit narrowed to $10,614 million (5.9% of GDP) for the year ended June from $14,569 million (8.1% of GDP) for the year ended March. That was the smallest year ended deficit as a percentage of GDP since September 2004.
- Developing Asia will grow 3.9% in 2009 and 6.4% in 2010, revised up from previous estimates of 3.4% this year and 6.0% next year, the Asian Development Bank said. The ABD also upgraded its growth outlook for China, forecasting the Chinese economy will expand 8.2% in 2009 and 8.9% in 2010, up from previous projections of 7.0% this year and 8.0% next year.
FX Strategy Update