To say it was an interesting day in the currency markets would be an understatement. The US dollar and the Japanese yen ended as the strongest of the majors, but they were well on their way to be the weakest during the European and early US trading session. Indeed, ahead of the release of US consumer confidence, carry trades were making headway and US stock market futures were rising in anticipation of strong results. In the end, the markets were correct in anticipating better results, but wrong on the subsequent fallout. In fact, shortly after the Conference Board announced that their measure of US consumer confidence jumped to a three month high of 54.1 from a revised 47.4, US stocks started to pullback from intraday highs, and the US dollar and Japanese yen rallied. These moves may suggest that optimism has hit an extreme, and with the DXY index holding above a trendline connecting the July 2008 and August 2009 lows, and many of the JPY crosses showing signs of reversal, we may be finally nearing the return of risk aversion. That said, I was beating this drum last week and got burned as a result, so I’ll be awaiting confirmation signals (such as trendline and neckline breaks in pairs like GBPUSD, GBPJPY, and EURJPY) before taking decisive action.
Taking a closer look to Tuesday’s data, a breakdown of the consumer confidence report shows that the increase was due primarily to surge in consumer expectations, as this component rose to 73.5, the highest since December 2007, from 63.4. The index gauging sentiment on the present situation, however, was not as optimistic, as this component edged up to 24.9 from 23.3, leaving it near the same levels we’ve seen all year. What does this tell us? It suggests that consumers have been buying in to the cheerleading perpetuated by government and central bank officials, but they haven’t seen any sort of economic improvement in their own lives.
On Wednesday, US durable goods orders is projected to show a 3.0 percent increase in July following a 2.5 percent drop in June, but excluding transportation the index is forecasted to only rise by 0.8 percent. While the headline result will have the most impact on forex trading, the markets should keep an eye on non-defense capital goods orders excluding aircraft, as this number serves as a leading indicator for business investment. This component has improved over the past two months, and a continuation of this dynamic would be supportive of outlooks for a slow and steady recovery in the US economy.