US Dollar Weakens as Prospects for a Rate Hike Diminishes

· [B]US Dollar Weakens as Prospects for a Rate Hike Diminishes[/B]
· Malta’s Euro Application and Hawkish ECB Comments Helped to Boost Euro
· Japanese Yen Extends Rally on Hawkish Comment from Shiozaki

US Dollar - Weakens as Prospects for a Rate Hike Diminishes

Our action packed week begins tomorrow and judging from today’s price action and analyst estimates, traders are not expecting the US releases to be particularly dollar friendly. We start off with the January durable goods orders report tomorrow. Although a drop in Boeing orders is expected to drag total orders lower, even excluding the volatile transportation component, demand for goods made to last for more than three years is expected to drop. Taking a look back at the last three reports on orders for durable goods, the market’s reaction tends to be very volatile because of the underlying information provided by the ex transportation component. However by the end of the day, the headline number left a longer lasting reaction in the EUR/USD. Aside from durable goods, we are also expecting consumer confidence and existing home sales. Higher oil prices over the past few weeks will probably weigh on confidence, which leaves the home sales figures as the wildcard. The Federal Reserve is watching the stability of the housing market very closely and at this point, analysts are expecting an increase in sales of existing homes. Strength in this report could offset any disappointments in the durable goods report. In today’s Financial Times and Wall Street Journal, there are competing headline articles about how the Federal Reserve may have changed their belief that low unemployment induces inflation. Recent comments from Ben Bernanke suggests that unemployment may be able to remain as low as 4.5 percent and still not induce inflation. If this is true, then the Federal Reserve may not be tempted to raise interest rates preemptively. Unless we see a meaningful pickup in the housing market, we believe that the Federal Reserve will continue to stand pat, especially as sub-prime lending market faces bigger risks.

Euro - Malta’s Euro Application and Hawkish ECB Comments Helped to Boost Euro

The Euro is modestly stronger against the US dollar thanks to optimistic comments from ECB member Quaden who reaffirmed the central bank’s hawkish stance by saying that the “ECB has a posture of strong vigilance” and the current level of interest rates does not hamper growth or investment. The only piece of economic data released from the Eurozone today was GfK consumer confidence, which dropped from an upwardly revised 4.9 to a weaker than expected 4.4. Consumer confidence was originally predicted to hold steady for the month of March, but the drop suggests that we could see softer German retail sales on Wednesday. Reminding the foreign exchange market about the behemoth that the Eurozone can become was the announcement from Malta today that they will be submitting their application for Euro membership tomorrow. Malta has been looking to join the Euro for some time and their early announcement is not a surprise. When you compare Malta’s $5 billion GDP with Germany’s $2.7 trillion, the difference that Malta will make is minimal. However the difference that it will symbolically is huge. The Eurozone is enlarging and its status as one of the world’s premiere reserve currencies is growing along with it. A Bloomberg Survey reported today that central banks are diversifying out of US dollars and the Euro should be one the primary beneficiaries. Looking ahead, we are expecting a number of Eurozone retail PMI figures as well as money supply or inflation data. Retail sales should have remained healthy while inflation growth is expected to slow.

British Pound - Holds Steady Despite Stronger House Price Data

There was not much action in the British pound today as the currency remained unchanged against the US dollar and slightly weaker against the Euro. House prices according to the Hometrack index grew by 0.7 percent, which was the fastest pace of growth since May 2004. Any optimism however was offset by the comments from Bank of England member Blanchflower. Like the typical dove, he expects inflation to fall over the next few months and even dip below the central bank’s 2 percent target in the next one or two years. Unfortunately for British pound traders, both inflation and housing is important to the BoE. The lack of clarity on which dynamic is having a more dominant impact on the economy should keep the Bank of England on hold for the time being. Looking ahead, mortgage approvals are the only piece of data on the UK calendar tomorrow. No major disappointments are expected there.

Japanese Yen - Extends Rally on Hawkish Comment from Shiozaki

The Japanese Yen was stronger across the board today thanks to hawkish comments from Cabinet Secretary Shiozaki who said that prices are “picking up.” He also indicated that the improvement in the output gap reported last time was a welcome development. For the first time in 10 years, the output gap rose by 0.6 percent. Now that the Bank of Japan has already raised rates, it is hardly surprising that the market has shrugged off the dissenting votes in favor of a rate hike at the January meeting (rates were left unchanged at the time). Any signs of strength will certainly fuel speculation for further rate hikes by the Bank of Japan. The Japanese Yen could also receive boost from year end repatriation over the next few weeks. Corporate profitability has been exceptionally strong which could lead to sizeable repatriation ahead of the March 31st fiscal year end.

Commodity Currencies (CAD, AUD, NZD) - Benefited From Stronger Gold Prices

The Australian and New Zealand dollars are stronger today thanks to the continued rebound in gold prices. The Canadian dollar failed to benefit however as the rally in oil prices is becoming exhaustive. There was no Canadian or Australian data released today. The Canadian stock market hit a fresh record high, but traders completely shrugged that off. New Zealand reported a wider trade deficit and weaker business confidence. A one time aircraft order boosted the import balance, but export growth was also weaker than expected. Australian new home sales and New Zealand money supply are the only pieces of data due from the commodity bloc tonight.