Forex - Dollar Weakens Slightly After Disappointing Durable Goods

FXCM - DailyFX Fundamentals 09-27-06

By Kathy Lien, Chief Strategist of www.dailyfx.com

- Dollar Weakens Slightly After Disappointing Durable Goods and New Homes Sales
- Euro Rebounds on Stronger Data and Hawkish Comments
- Japan??�s New Finance Minister Sees No Problem With EUR/JPY Value

US Dollar

This morning??�s US economic releases were mostly bearish for the US dollar, yet the greenback sold off only against the Euro and Canadian dollar. This price action is a clear representation of the dull range bound trading that we been trapped in but for those looking for excitement, we want to point out that breakouts and reversals are beginning to happen in currency pairs such as EUR/JPY, NZD/USD, AUD/NZD and AUD/CAD. Most of these are currency crosses and they are usually the more interesting ones to trade when the direction for the US dollar is unclear. Even though orders for durable goods dropped in the month of August, new home sales were revised down to the worst levels since March 2003 in July and mortgage applications fell 4.9 percent over the past week, we still do not have a good enough reason to expect the Federal Reserve to begin cutting interest rates. Tomorrow??�s GDP report could shed more like on how the economy is doing, but only if we see a revision to the second quarter release. Unfortunately, more range trading seems to be in the fate of the dollar until October when we receive the latest non-farm payrolls and retail sales reports. On top of that, regional banks are set to announce third quarter earnings beginning in October. We are watching the earnings of regional banks because it will give us a first look at how consumers may be affected by the increase in interest rates. If we see weaker profitability and higher defaults, it will lean the Federal Reserve closer to cutting rates. Part of the Fed??�s job is to maintain stability in economic growth and prices, but the other part is to ensure stability in the banking sector. We cover the importance of watching the banking sector in more detail in our special report titled ???Watch What the Fed Watches ??� Banking Sector Update??? on www.dailyfx.com.

Euro

Thanks to the combination of weaker US economic data and stronger Eurozone data, the Euro has managed to recuperate some of its recent losses against the US dollar. After yesterday??�s drop in the forward looking component of the German business confidence index, it was a welcome surprise to see better numbers in Italian business confidence, Italian retail sales, the German Gfk consumer confidence report and Eurozone M3. This has helped to rally the Euro against not only the US dollar, but also the British pound, Japanese Yen and Swiss Franc. The boost in confidence was partially related to the planned purchases by German consumers before the increase in the VAT tax in January. It would be the largest increase in 60 years and could provide some short term support for the German economy. Meanwhile stronger inflation numbers signal that the European Central Bank will still need to raise interest rates again this year which was confirmed by the hawkish comments by ECB member Weber. He repeated the central bank??�s call for ???strong vigilance??� on inflation and said that interests rates are still very accommodative. Well we know very well that one more rate hike is in the pipeline, but we will need to rely on future data to tell us if more will come. Both German and French unemployment data are due for release tomorrow and analysts are currently predicating improvements in both. Should that be the case, we could see a further extension of the EUR/USD rally. Over in Switzerland, even though the country has leaped to the number one slot in global competiveness according to the World Economic Forum, its leading indicators report recorded the weakest reading in five months and fell for the third month in a row.

British Pound

There are good reasons to assume that the Bank of England will probably keep interest rates on hold for the remainder of the year. Earlier this week, we heard more hawkish comments from BoE Monetary Policy Committee member Gieve. However this morning, we heard more dovish comments from his colleague Blanchflower who felt that unemployment may begin to tick higher and as a result, the risks to the economy are weighted more towards slower rather than faster growth. The division within the central bank indicates that the economic outlook is murky. Until there is a more definitive sign of how the economy is performing, there is no reason for the central bank to alter the country??�s current monetary policy. GDP was revised lower for the second quarter along with the deflator, but the current account deficit was revised higher while mortgage lending figures were also strong. Nationwide House Prices is the only economic release on the UK calendar tomorrow. The GBP/USD is beginning to find support, which could help to foster a near term bounce.

Japanese Yen

Say goodbye to Tanigaki and hello to Omi, the new finance minister of Japan. Even though he is a self-proclaimed amateur on currencies, he said overnight that he does not ???think (that) we are at the stage to make special comments or act??? on the weakness in the yen against the Euro. The market has perceived this as a green light to take the EUR/JPY higher and as such, the pair has broken to the upside. The yen also weakened against the rest of its major counterparts. Under the new leadership, there is one interesting thing that we will be looking for. The Koizumi administration frequently interfered in the Bank of Japan??�s policies. Omi has pledged that the BoJ will remain independent and if that is truly the way Abe??�s administration feels, then interest rate hikes could come sooner rather than later.