The US dollar ended the past week marginally higher after the Federal Reserve issued a more optimistic outlook on the economy. In the coming week, though, there will be a variety of growth indicators on hand that may help to signal whether the US recession really ended in Q2. That said, the US dollar index will have to contend with resistance just above 77.00 at the start of the week, but a break above there will likely coincide with a EURUSD drop below 1.4615.

US Dollar: Optimistic Economic Outlooks to Meet Hard Facts This Week

Fundamental Outlook for US Dollar: Bullish

- The Federal Reserve left rates unchanged, but signaled a more optimistic outlook
- University of Michigan consumer confidence jumped to a 21-month high in September
- US durable goods orders tumbled 2.4% in August, marking the steepest drop since January

The US dollar ended the past week marginally higher after the Federal Reserve issued a more optimistic outlook on the economy. In the coming week, though, there will be a variety of growth indicators on hand that may help to signal whether the US recession really ended in Q2. That said, the US dollar index will have to contend with resistance just above 77.00 at the start of the week, but a break above there will likely coincide with a EURUSD drop below 1.4615.

Looking to the upcoming event risk, on Tuesday, the September reading of the Conference Board’s measure of US consumer confidence is expected to rise up to a one-year high of 57 from 54.1 in August, but overall, there are some upside risks for this report. Indeed, the final reading of the University of Michigan’s consumer confidence index show that sentiment improved greatly in September, with the index hitting a 21-month high of 73.5 from 65.7.

On Wednesday, the third round of US Q2 GDP estimates is due to hit the wires, but the results will only be market-moving if we see surprising revisions. The final reading is forecasted to be revised down to -1.2 percent from -1.0 percent, though this would still represent a sharp improvement from Q1, when GDP plunged 6.4 percent. Readings in line with expectations may not have a very big impact on price action, but better-than-anticipated results could lead carry trades higher, especially in light of speculation that the recession may have ended in Q2.

On Thursday, the ISM manufacturing index is projected to rise for the ninth straight month in September to 54 from 52.9, which would be the highest reading since April 2006. With 50 being the point of neutrality, this would also be the second month that the index signals an expansion in activity, adding to evidence that the sector is experiencing a recovery in business activity. The last release didn’t have much of an impact on the US dollar, as risk aversion dominated the day, leading the currency higher. However, the report will still be useful because of its employment component as a leading indicator for the big news on Friday: US non-farm payrolls.

The US non-farm payrolls (NFPs) index is forecasted to show job losses for the 21st straight month in September, though the rate of decline is anticipated to slow further. At the time of writing, Bloomberg News was calling for NFPs to decline by 187,000, which would be the smallest drop since August 2008. Meanwhile, the unemployment rate is projected to edge up to 9.8 percent from 9.7 percent, but ultimately, the NFP result will be the event to watch as it is extremely volatile and is one of the sole reports that impacts the US dollar from a pure fundamental point of view. A better-than-anticipated result is likely to provide a boost to the US dollar, but it will be interesting to see the impact of disappointing results as weak US data tends to weigh on risky assets and push the greenback higher amidst flight-to-quality. – TB

The dollar was able to relieve the pressure of suffering its worst trend on recent record by clawing out the first bullish close in eleven consecutive trading days; but that does not mean the burdened currency is necessarily primed for a true reversal. While this currency is arguably oversold on a fundamental basis; the same drivers that ushered it to its yearly low last week are still in play.

US Dollar Overdue for a Technical Bounce, But Fundamental Reversal…

Fundamental Outlook for US Dollar: Neutral

-    Speculation for rate hikes deferred as fundamentals temper exuberant risk appetite
-    The steady charge in risk appetite keeps the dollar on the short side of carry interests
-    Sentiment can often run askew of fundamentals; but what do technicals say about the dollar?

The dollar was able to relieve the pressure of suffering its worst trend on recent record by clawing out the first bullish close in eleven consecutive trading days; but that does not mean the burdened currency is necessarily primed for a true reversal. While this currency is arguably oversold on a fundamental basis; the same drivers that ushered it to its yearly low last week are still in play. The pace of the economic recovery, growing financial concerns and a Fed struggling to keep pace are all prominent concerns when gauging the long-term health of the dollar; but all of that is overshadowed by the immediate and market-wide preoccupation of risk appetite.

Last week, a Bloomberg survey of investors found the market was the most bearish on the dollar in 18 months. Where does this speculative grade come from? The economy is still dealing with an economic recovery and government deficits are a genuine concern; but most of the world’s largest economies are suffering with the same dilemma. The real weight on the dollar is the steady revival of risk appetite over the past six months. Following the necessary period of consolidation after the worst of the financial crisis, capital started to slowly work its way back into the speculative arena. Initially, interest was from early adopters; but the draw of capital gains was strong enough to start the flow from deeper pools of wealth in “risk free” areas. Where do these funds go? It certainly finds its way to US equities and other relatively-risky assets; but when it comes to the yield bearing instruments, the American products can’t compete. The benchmark, 3-month Libor rate dropped to a new record low (0.28948 percent) this past week and subsequently was depreciated to a discount against its Japanese (0.34875 percent) and Swiss (0.29667 percent) counterparts. Does the dollar realistically make the ideal funding currency? No. The Fed will certainly turn to a hawkish policy stance well before the other two, it has the potential to take a more consistent hawkish path, deficits are a problem amongst all three and the foundation for a true recovery is most stable in the US. As soon as US rates recover, risk-seeking capital will once again flow into the world’s financial center.

In the meantime, we may see a shift in sentiment that could benefit the dollar’s safe haven status. The broader markets have rallied consistently for months – despite a fundamental picture that has changed pace little since the initial reversal. Naturally, a wave of profit taking is highly probable. And, considering the advance to this point has been heavily dependent on steady capital gains, a correction could be sharp and aggressive. There are many different potential catalysts for such a turn; but in the end, the shift in optimism will likely develop naturally. Nonetheless, we should keep an eye on a few specific developments. Reports suggest that lending to consumers has dropped at its fastest pace since the Great Depression; yet leverage has returned to levels last seen since before the 2007 meltdown. This is an imbalance that will lead to problems later down the line if not corrected. Also, the Federal Reserve and White House have both voiced concern over the commercial real estate debt market. The former is looking into major banks’ exposure to this asset class; but the term ‘stress test’ is not being used.

Though it is vital to keep abreast of the health of risk appetite; we shouldn’t ignore the influences of data and growth forecasts. The economic docket is light next week; but durable goods orders and housing data (existing sales, new home sales) can supply short-term volatility. It is the FOMC that tops the list – not with a possible change in the benchmark, but commentary that can move up the time table for a hike. Data aside, the US/China trade spat hints at a growing concern with protectionism which may come under scrutiny at the September 24/25 G20 Meeting. Exit strategies, financial regulation, banking compensation are all on the topic list; but not currencies. – JK

kay, the recovery will not be “V” shaped.  It may not be “W” shaped, so today’s media experts now refer to the recovery as “U” shaped, even if it is an extended “U.”

Well, one thing is for sure, the longer this recession-recovery goes on, the smarter the Oracle of Omaha looks.  Yes, Warren Buffet has a way of putting his finger on the pulse of the economy.  Frankly, the real mystery is why everyone else either does not see what he sees or why they are unable to express their vision as succinctly as the Oracle.

For the past three months, every time Buffett has appeared on CNBC he stresses one consistent symptom.  Hey guys and gals, listen up will you!  This guy gets it, plain and simple.

This recession was in large part caused by faulty and probably unscrupulous lending practices that inflated the value of the residential real estate market and loaded the banks with toxic assets.  The Oracle has said repeatedly that this recovery will not take hold until the excessive residential real estate inventory is brought under control, meaning sells out.  Everything else may be “less bad,” a popular news slogan these days, but that simply stands for baseless.

This recovery has no foundation until the existing residential real estate market is cleared up and moved out.  And, even the Oracle admits that the depth of the backlog may be bigger than expected.

As more and more residential mortgages fail and as more than 1 in every 355 homeowners is in the foreclosure process, the inventory ceiling has yet to be identified.  Buffett does not get too specific about this figure, but the facts are the facts.  There is at least one year’s worth of inventory backed up now.

Are Housing Starts Really Encouraging?

The Commerce Department released figures showing that new housing starts increased by 1.5% from July to August.  The seasonally adjusted rate is now at 598,000.  New building permits rose sharply by 2.7%.  Year-over-year permits applications were 37.3% ahead of last year.  On the surface, that looks like good news.

However, single family home construction actually declined by 3% to a seasonally adjusted rate of 479,000 units.  The figure had risen each of the previous five months.

Earlier in the week, this was precisely what Buffett had predicted.  In order to clear out the excess residential inventory, new single family housing starts needs to suffer further.  It is becoming increasingly evident that government initiatives are driving the recovery, not national or global economic growth.  Joseph Brusuelas of Moody’s Ecconomy.com explained; “We are at the stage where an economy exits recession.  The recovery is going to be moving along due to policy initiatives and inventory restocking.  It’s a U shaped recovery with some parts of the U a little bumpy.”

The rise in housing starts is partly fueled by the upcoming November 30^th expiration of the first-time homebuyer’s $8,000 tax credit.  On Thursday, Treasury Secretary Timothy Geithner reported that the administration has not decided to renew the first-time homebuyers tax credit or any version thereof.  This tax incentive is responsible for more than 375,000 single-family sales so far this year.  Real estate lobbyists have been pushing an expanded version of the tax credit that would put more money on the table and would not be limited to first time buyers.

The ball seems to be in the hands of the Federal Reserve, who meets next week.  As Chairman Bernanke has indicated, the recovery is underway.  The Federal Reserve is believed to be more interested in finalizing an exit strategy rather than pumping more money into the economy.

This is bad news for the 9.7% of Americans receiving unemployment benefits.  It is also bad news for the housing market.  The majority of existing home sales are in the low-end, first home buyer price range.  In addition to the first time buyer, 33% of home sales are distressed sales, meaning either facing foreclosure or already in the system.

Would someone please tell Secretary Geithner that a 2010 tax credit is absolutely necessary.  Let’s get this U moving upwards.  Rather than pull back from the tax credit policies of the past, let’s expand them and put some fuel on the fire.  This is important work.  Tim, talk to the Oracle of Omaha!

US Dollar Forecast Bearish on Clear Downward Momentum

Fundamental Outlook for US Dollar: Bullish

-    US Dollar hits new lows, but do fundamentals support declines?
-    Greenback falls against Euro for six consecutive trading days
-    Forex sentiment points to further US Dollar declines

The US Dollar dropped like a stone on its way to fresh 2009 highs against nearly all major forex counterparts, breaking its long-standing trading range against the Euro in fairly dramatic fashion. The first full week of post-summer trading finally brought the sustained price moves we have long been waiting for. FX Trading volume increased notably through mid-week trade and fueled US Dollar losses, but fundamental “justification” for renewed US Dollar weakness was far less clear. According to FXCM execution desk data, open interest in the Euro/US Dollar jumped by as much as 20 percent before the week was through. A busy economic calendar in the week ahead suggests that the US Dollar may remain volatile, and it will be critical to see whether its recent downtrend may be sustained.

Demand for the safe-haven US Dollar dropped sharply on the week as the US S&P 500 and other major risk barometers reached fresh year-to-date peaks, and overall momentum favors USD losses. Indeed, forex options markets show that option traders are betting on further US Dollar weakness against almost all major counterparts. Yet those same options prices show short-term volatility expectations have dropped to their lowest levels in the past year. The fact that US Dollar weakness has not coincided with a general rise in forex volatility expectations suggests that currencies could return to sideways trading, but this will likewise depend on developments in financial market risk appetite. The 20-day correlation between the Euro/US Dollar and S&P 500 currently trades almost exactly at record-highs.

To that effect, traders should keep close tabs on S&P 500 reactions to the coming week of key US event risk. Highlights will likely include the historically market-moving Advance Retail Sales, Consumer Price Index, and Treasury International Capital System reports. Consensus forecasts call for a noteworthy pickup in domestic Retail Sales, but the expected surge is mostly a function of the highly-publicized “Cash for Clunkers” program that strongly boosted Auto Sales. Traders should instead watch for surprises out of the “Ex Autos and Gasoline” figure—predicted to gain a paltry 0.1 percent on the month. If numbers prove better than expected, the S&P will likely rally and the US Dollar may actually decline.

The following day’s Consumer Price Index numbers are less likely to force major US Dollar volatility, but traders should nonetheless keep an eye out for any especially large deviations from consensus expectations. The true fireworks may come on subsequent Treasury International Capital System (TICS) data. Analysts have long argued that massive US fiscal deficits could harm the US Dollar as the government floods markets with debt securities. Yet recent data shows that foreign demand for US Treasury bonds remains robust, and the US Dollar has thus far averted disaster. It remains important to watch for continued demand for Treasuries, and any disappointments could further fuel dollar losses.

Momentum plainly favors further US Dollar weakness, but key event risk in the week ahead could prove pivotal in deciding near-term direction for the downtrodden currency. – DR

The US dollar, British pound, and Canadian dollar are all anticipated to face data indicating further declines in inflation growth. However, the bigger market-movers may be the US retail sales report and the Swiss National Bank’s rate decision, especially because the central bank has been quite liberal in their discussion of FX intervention.

•    UK Consumer Price Index (AUG) – September 15, 4:30 ET
The UK’s consumer price index (CPI) reading for the month of August is expected to rise 0.3 percent, but the more important part of this report is that the annual rate of growth, which is more closely watched by the Bank of England, is forecasted to fall to 1.4 percent, the lowest since October 2004, from 1.8 percent, keeping inflation within the central bank’s acceptable range of 1 percent – 3 percent, but below their 2 percent target. If CPI falls more than projected, the British pound could pull back sharply as the markets will anticipate that the BOE will expand their quantitative easing efforts even further before year-end. On the other hand, if CPI holds strong, the currency could rally in response.

•    US Advance Retail Sales (AUG) – September 15, 8:30 ET
The Commerce Department is forecasted to report that US retail sales jumped 1.8 percent in August, which would mark the biggest monthly rise since January 2006, led by increased auto and gas station sales. Indeed, as the deadline for the “cash for clunkers” program neared on August 24, eligible buyers likely rushed to take advantage of the deal. Furthermore, this index is not adjusted for inflation, so the steady rise in average gasoline prices during the month should contribute to overall gains. That said, excluding items like autos and gas, advance retail sales are projected to edge only 0.1 percent higher, following 5 consecutive months of contraction, and there may be even greater upside potential due to “back to school” shopping. Measures of consumption could start to deteriorate once again in September, though, as the impact of the “cash for clunkers” program fades and as unemployment continues its steady ascent. Nevertheless, if the August reading of US advance retail sales reflects strong results, the US dollar could rally in response.

•    US Consumer Price Index (AUG) – September 16, 8:30 ET
As seen in the release of the US import price index, a rise in petroleum costs may push the headline consumer price index (CPI) up 0.3 percent in the month of August, while the annual rate could edge up to -1.7 percent from -2.1 percent. On the other hand, the annual rate of the core CPI, which excludes volatile food and energy prices, is projected to fall to 1.4 percent, the lowest since February 2004, from 1.5 percent. Such moves would likely be disconcerting to the Federal Reserve, as it would suggest that the broad decline in demand is now the prime driver of price declines, which could force the central bank to keep their extraordinary liquidity measures in place for longer than previously expected.

•    Canadian Consumer Price Index (AUG) – September 17, 7:00 ET
The annual rate of Canadian headline CPI growth for August is projected to edge up to -0.6 percent from -0.9 percent, but on the other hand, the Bank of Canada’s core measure is projected to ease back to a one-year low of1.6 percent from 1.8 percent. Such results would suggest that price declines are less the result of falling commodity costs and instead, downward pressures are starting to come into play for prices throughout the broader economy. The Bank of Canada said in their most recent policy statement that “overall risks to its inflation projection are tilted slightly to the downside,” and if we start to see even core measures of inflation fall toward zero, the Canadian dollar could pull tumble.

•    Swiss National Bank Rate Decision – September 17, 8:00 ET
The Swiss National Bank is likely to leave their 3-month LIBOR target range unchanged at 0.0 percent – 0.75 percent, but the thing to watch for in the SNB’s subsequent policy statement is talk of FX intervention. The central bank reiterated during their last meeting in June that they would “take firm action to prevent an appreciation of the Swiss franc against the euro,” but 1.50 has really proven to be the one point in EURCHF to prompt them to take action. Overall, if the SNB takes a more aggressive stance on the issue this week, EURCHF could easily surge higher, but if the bank drops their statements on the topic altogether, the Swiss franc is likely to surge across the majors.

Have you ever seen someone make a mistake and not only do they suffer for it but someone else does as a result also? Well, this is exactly what’s happening to Canada right now.

You see, most of last year, you could say that the Canadian dollar was falling because of falling commodity prices. Since Canada exports so many widely used commodities like oil and lumber, when prices fall, so do their profit margins. It costs them about the same amount to produce the product but what they can get for it in the market is determined by where those commodities are trading at the time. Click on the chart below to enlarge it.

USD/CAD Pushes Towards 1.30 Once Again!

Last Year the Commodities Crash Killed the Canadian dollar. This Year it’s the U.S. Economic Crash that’s Killing Them!

So that was what hurt them much of last year. Now we roll into 2009, and they get killed by another dynamic: the increasing slowdown of the U.S. economy!

For three months in a row now, the U.S. economy has shed around 600,000 jobs or more back to back! The unemployment rate seems to be going somewhat parabolic at this point. It jumped from 7.6% previously to 8.1% now.

On top of this, to buffer the blow of the slowdown, Canada’s central bank had to lower interest rates once again (to 0.50%) which put it at the lowest their interest rates have EVER been!

While this is a dynamic that will eventually be good for their economy, it hurts their currency right now for sure.

They also stated that they may implore “Quantitative Easing”. What the heck is that? Well, in simple terms it means that they will print money out of thin air and load up the banks with so much excess cash that they are more likely to lend money and thus spur economic growth.

While that may eventually give their economy a boost, it kills their currency. Why? Look at it this way. Anytime something becomes more abundant, it becomes worth less. Anytime something becomes scarce, it becomes more valuable. (This is why a Corvette in the 1960’s may have gone for $3,000 then and would sell for $30,000 to $60,000 today. These days, they are scarce…yet they weren’t back then).

So when the market is flooded with more money (Canadian dollars), that money gets devalued and is worth less. Therefore it takes more (Canadian) dollars to buy the same amount of goods.

The U.S. is Printing Money too, but Right Now they are Saved Because they are the World’s Reserve Currency (and thus a “Safe Haven”).

Now, you may say but isn’t the U.S. doing the same thing? After all, their economy is slowing down. They are printing money too.

I would say, while I won’t deny that point, the U.S. dollar presently benefits from what is called the “safe haven bid”. What does that mean? It means that investors all over the globe are running to the safety of the U.S. dollar because it’s the world’s reserve currency right now.

In other words, if there’s one currency on the face of the earth that you are most likely to keep and continue to use, it’s the one that most of the goods are priced in all over the world. For example, gold, oil, wheat, soybeans, lumber, etc. are all priced in U.S. dollars.

Therefore in crazy times like this, it enjoys the benefit of being the world’s reserve currency. However, once the global economy finally does return to normal, then this “benefit” will suddenly go away and the dollar will just have to stand on its own fundamentals once again. We all know that once that happens, the buck doesn’t have that much to stand on. Therefore, the “dollar party” may come to an end ONCE the global economy normalizes.

In the mean time, Canada’s currency (and economy) will continue to suffer as the U.S. lays off more workers and continues to slow down. Remember, they derive about 79% of their exports from the U.S. That’s huge! In fact, it’s so huge…it’s the largest trading relationship between two countries according to Canada’s trade department.

This really is huge, because the U.S. hasn’t had three back to back months of layoffs this big since they started keeping records on it back in 1939. So from at least as far as our records go back, this has never happened on this scale before!

Scheduled on the same day, both the UK inflation report and FOMC rate decision are expected to jolt the FX market this week, at least a tad. Set for Wednesday, the UK report is anticipated to show a further slowdown in consumer and producer prices with additional central bank statements alluding to a continued slowdown in the UK economy. Recent reports show nothing but support for the near term decline in prices. For the month of June consumer prices rose a paltry 1.8 percent from the year before as producer prices rose at the lowest level in eight years. What pound bulls will most likely be attuned to will be the probable downgrade in overall growth by the Bank of England. Following the expansion in quantitative easing of an extra 50 GBP billion last week, traders are expecting the worse for the subsequent statements. If the same fears are proven right, the underlying currency will come under pressure as further accommodative policies are likely to emerge in the coming quarters. Even worse has been speculation of a deflationary trap in the country, where prices continue to move low enough to choke off spending by both consumer and producer sectors, leading GDP further lower. Adding fuel to the fire has been Governor King’s refusal to completely rule out further expansion of cash injections into the financial system.

To Buy or Not To Buy

Currency traders will also be eyeing the Federal Reserve’s interest rate decision later on in the day, following the UK inflationary report. Although most, if not all, are expecting the benchmark rate to remain the same, the question hovers over any further plans to expand the program to buy long dated government Treasuries. Heading into the month of August, the Federal Reserve has already fulfilled a majority of its previous commitment, purchasing approximately $250 billion of the allotted $300 billion. In addition, the central bank is set to purchase $1.45 trillion in mortgage debt by the end of the year. All of this in order to boost liquidity and lending while ensuring that benchmark rates remain relatively stable. However, given the recent unemployment report, will there really be a need to expand the program? Market participants answer with a resounding “no”. Given the uptick in non-farm payrolls last week, stable economic indicators and a relatively thawed credit market, central bankers will favor completion of the program over expansion. The sentiment is likely to give risk tolerance a boost as slim anticipation still lingers of a rise in interest rates at the tailend of Q4.

Retailers Find a Silver Lining

US retail sales are expected to have kept positive in the month of July, which would be the third consecutive month in a row and a definitive sign of economic stabilization. Set for release on Thursday morning, the report is forecasted to show a rise of 0.5 percent. Good support for market bullishness, speculative sentiment will be focused on the contribution and effects of the Cash for Clunkers program on the actual figure. Beginning last month, the administration’s plan for boosting auto sales may temporary increase the figure, leading some to believe the improvement will be a flash in the pan. Estimates are for the ex-auto number to be considerably lower, rising by only 0.1 to 0.2 percent for the month.