[B]Talking Points[/B]
• Japanese Yen: Weakens further on hawkish Fed remarks
• Australian Dollar: Retail Sales hot, but off the highs as gold retreats
• Euro: Retraces after taking out the 1.4500 stops
• Pound: PMI weaker than expected but still above 50
• US Dollar: ISM and personal income on tap
After reaching record lows against the euro in the wake of yesterday’s Fed’s 25bp rate hike, the dollar rebounded in early European trade as better than expected US economic data and a hawkish sounding FOMC communiqué put in doubt any further greenback weakness for the time being. As we had noted several days ago, “a 25bp cut may actually prove dollar positive with the unit possibly staging a temporary relief rally.”
The key to any additional dollar strength will be contingent upon Friday’s NFP report. If the US economy can generate more than 100K+ jobs in October, the data would put to rest any immediate threat of a possible US recession. Much of the recent dollar weakness has been the result of the currency market pricing in just such a dour scenario. Should the labor markets prove to be resilient some of the late EURUSD longs may be unwound as traders pare back their expectations of additional Fed rate cuts for the foreseeable future.
Meanwhile we are likely to see more consolidation ahead of the US session when the ISM numbers and personal income data hit the screen. Given yesterday’s weak Chicago PMI numbers there is some danger that ISM may print below forecast as well, but the markets may focus more on the US personal income/personal spending numbers. In order for dollar longs to make a credible case that US economy is not vulnerable to a substantial slowdown, the report will have to demonstrate that US consumers enjoyed steady income growth in October. Growth in income is critical to the health of US consumer spending during the upcoming Christmas shopping season, especially so this year, when many US consumers have seen their net worth erode in the relentless decline of the housing sector.
In Europe today, the docket was very quiet with only Swiss and UK PMI data on tap. The Swiss numbers rebounded, but UK manufacturing continues to show signs of deterioration as higher exchange rates and interest rates are starting to weigh on the country’s producers. Nevertheless, despite slipping to 52.9 from 54.5 projected manufacturing activity remained comfortably above the 50 boom/bust level and is unlikely to motivate the BoE to move off its neutral stance in November. It does however suggest that the continent’ s industrial sector may be finally feeling the impact of high exchange rates. Tomorrow’s EZ PMI manufacturing numbers will tell more of the story and should they surprise to the downside further EURUSD weakness could follow.
