The US Dollar has started out the New Year on a soft, but not entirely unusual note, as the oft-beleaguered currency has given up nearly all of the gains achieved on the last day of 2007.
[B][U]Talking Points[/U][/B]
· [B]Australian Dollar: AiG manufacturing index surges to 5-year high[/B]
· [B]Euro: Rebounding towards 1.47 despite soft data [/B]
· [B]British Pound: Consolidating around 1.98-1.99[/B]
· [B]US Dollar: Weakening ahead of ISM Manufacturing, FOMC Minutes[/B]
[B][U]US Dollar Eases Into 2008 as Euro Rebounds Towards 1.47[/U][/B]
The US Dollar has started out the New Year on a soft, but not entirely unusual note, as the oft-beleaguered currency has given up nearly all of the gains achieved on the last day of 2007. Indeed, EURUSD has rebounded and is currently targeting the 1.47 level once again, while USDJPY remains heavy amidst consolidation above 111.50. Against the British Pound, however, the greenback has held its own as the pair trades near 1.9850, which is down quite a bit from the prices above 2.00 we saw just a few days ago.
Looking at today’s economic data, PMI reports showed that growth in the European and UK manufacturing sectors slowed in December. Indeed, Euro-zone manufacturing PMI eased to 52.6 during the month from 52.8, with a breakdown of the index showing a drop in output and new orders. UK manufacturing PMI reflected much of the same sentiment the index slipped to 52.9 from 54.3 on faltering production and orders. With global growth widely anticipated to take a hit in 2008, the data does not bode well for the European and UK economies as both domestic and foreign demand stalls. Meanwhile, the price components of both the Euro-zone and UK PMI reports reflected easing price pressures, which will at least allow the European Central Bank and the Bank of England room to be less stringent in regards to monetary policy as they fight to maintain price stability, and in fact, raises the chances that the central banks will move to cut rates in 2008. Furthermore, this shift to a more accommodative interest rate environment supports the case for EURUSD and GBPUSD losses later in the year, as the DailyFX Research Team goes on to describe in the DailyFX 2008 FX Market Outlook.
One region that may be spared the brunt of a global economic slowdown is Australia, as an index of manufacturing sector performance jumped to 57.6 in December, marking the best read in more than five years. Given the economy’s focus on mining and proximity to rapidly growing regions like China, Australia has benefited from a boom in the price of commodities like gold and resilient export demand. While an easing in global growth will likely take a toll on the Asia-Pacific region – negatively impacting demand for foreign goods – the effects may not be as severe as in the US and Europe, especially as those countries’ financial markets grapple with a major credit crunch. As a result, while the impressive conditions we saw in Australia have probably already peaked, the economy will be far better equipped to weather 2008.
This morning, the US Dollar faces major event risk from the release of ISM Manufacturing – which will likely show similar results to the PMI reports from Europe and the UK – as well as the FOMC minutes later in the afternoon. The FOMC minutes may be the most critical, as they will potentially hold clues as to the bank’s next move on January 30. Fed fund futures are pricing in a 92 percent chance of a 25bp cut, but these expectations will be easily swayed by today’s news, so traders should keep an eye on the releases since they could spark wild price action in the FX, Treasury, and US equity markets.
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[B]Written by Terri Belkas, Currency Analyst for DailyFX.com[/B]