Reply #23: dollar watch [View All]

[UpInArms]

http://quotes.ino.com/chart/?s=NYBOT_DX&v=i

Last trade 75.687 Change -0.051 (-0.07%)

Retail Sales and PPI Turn Negative, Triggering Sharp Moves in the Currency Market

http://www.dailyfx.com/story/bio1/Retail_Sales_and_PPI_Turn_1200438095175.html

Retail sales and producer prices both contracted in the month of December, leading many traders to wonder whether the US economy will fall into recession. Spending on cars, electronics, furniture, gas station receipts, building materials, clothing and sporting goods all declined, reflecting a broad based slowdown in consumer demand. According to Bloomberg News, this is the worst year for US retailers since 2002. Interestingly enough, despite the softer numbers, the dollar did not weaken across the board today. In fact, it strengthened against the Euro, Australian and New Zealand dollars while selling off only against the Japanese Yen, British Pound and Canadian Dollars. The main reason for this divergent price action is because the weak data has caused a sharp rise in risk aversion. The Dow dropped as much as 275 points, triggering massive carry trade liquidation. Does this mean that the US economy will fall into a recession? Not as long as the Fed steps up to the plate. The futures market has completely priced in a 50bp rate cut, but this may only be a band-aid for a growing problem. Long term yields have remained stubbornly high and even though they will fall on a half point rate cut, the relief to borrowers may be minimal. The Federal Reserve really needs to act aggressively to restore confidence in the financial markets and to stabilize the economy. This means either an interest rates cut now (yes, that would be an inter-meeting rate cut) or 75bp of easing at the end of the month. The goal is to send let the markets know that the Fed is not playing around and will do everything in their power to prevent a recession from happening. With producer prices falling, the Federal Reserve actually has the flexibility to make a larger move. Tomorrow we are expecting another laundry list of US economic data that includes consumer prices, the Treasury International Capital flow report, Industrial production NAHB housing market index and the Fed’s Beige Book report. Most of the data should be dollar bearish, which would trigger more losses for the US dollar.

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Is the US Headed for Recession, If So Where Should I Park My Dollars?

http://www.dailyfx.com/story/topheadline/Is_the_US_Headed_for_1200430829356.html

Retail sales and producer prices both contracted in the month of December, leading many traders to wonder whether the US economy will fall into recession. Spending on cars, electronics, furniture, gas station receipts, building materials, clothing and sporting goods all declined, reflecting a broad based slowdown in consumer demand. According to Bloomberg News, this is the worst year for US retailers since 2002. With the growth in the labor market already slowing, will the drop in consumer spending push the US economy into a recession and if so, what does this mean for the US dollar?

Is the US Dollar Headed for More Losses?

Before discussing whether the US economy will fall into a recession or how much the Federal Reserve will lower interest rates, it is important to talk about what is in store for the US dollar. Despite weak retail sales and producer prices, the dollar did not weaken across the board today. In fact, it strengthened against the Euro, Australian and New Zealand dollars while selling off only against the Japanese Yen, British Pound and Canadian Dollars. The main reason for this price action is because the weak data has caused a sharp rise in risk aversion. The Dow dropped as much as 275 points today, triggering massive carry trade liquidation. Over the past few years, the AUD/USD, NZD/USD and to some degree also the EUR/USD all were bought for carry trades. However the latest wave of weakness in the high yielders may actually provide good buying opportunities if the dollar continues to weaken. As the Federal Reserve lowers interest rates, stability should be restored in the financial markets, allowing the currencies of countries with strong fundamentals and inflation pressures to appreciate once again. One great example is the Australian dollar. A tight labor market, rising consumer demand, higher inflation pressures and $900 gold prices all point to medium term gains for the currency. The only reason why it sold off today is because of carry trade liquidation. USD/JPY could also extend its fall because Japan will not able to raise interest rates if US growth slows materially.

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Recession or No recession?

As for the US economy, although some economists will argue that the US economy is already in a recession, we do not agree. The definition of a recession is two consecutive quarters of negative GDP growth and in the last two quarters, GDP growth was strong. Even if the economy contracted in the fourth quarter, that would be one quarter of negative growth, not two. The first quarter has just started so it is too early to tell how the US economy will fare. Also, retail sales were bad but spending has been very volatile. Back in June and January of 2007, spending also contracted after a month of solid growth. Retail sales in November increased 1.0 percent which means that part of the decline in December was payback for the strong numbers. The Federal Reserve has the power to determine whether the US economy falls into a recession. If they step up to the plate now they can still prevent the slowdown from worsening.

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