The dollar dipped on Thursday but stayed near a 10-month high versus the yen as minutes from the Federal Reserve’s last policy meeting further dented expectations that the central bank could cut interest rates in early 2007, but the euro is seen recouping some of its losses and heading to at least $1.2590 to ideally $1.2650.
The minutes from the Sept. 20 meeting released on Wednesday showed that Fed policy-makers remained “quite concerned” about inflation risks and renewed their commitment to control inflation pressures.
FED minutes have come in hawkish and while the FED acknowledged that ‘economic activity has continued to decelerate’ it noted that there were substantial upside risks in its inflation outlook. Moreover, by indicating that real disposable income was increasing with ‘solid gains in June and July’ it left the impression that it does see the housing slow down as an isolated event not at risk of affecting the economy too much at this stage. However, by suggesting that a ‘significantly more sluggish outcome could not be ruled out’ it signalled that it understands the downside risks of the economy. On the other hand FED members ‘emphasized that they continued to be quite concerned about the outlook for inflation,’ even amid declines in energy prices, some improvement in core inflation, still contained inflation expectations, and forecasts for moderation in growth.
The market’s reading of the minutes is that the FED is pausing for a prolonged period of time. The
Today’s release of the US Beige Book and tomorrow’s September retail sales and October consumer confidence data should provide additional USD support.
USDCAD has moved above the 200 day MAV at 1.1320 and with oil prices testing new lows driven by the renewed cut back of oil demand projections by the IEA and doubt that
OPEC can successfully implement production cuts will put the CAD under additional pressure. Today, the Canadian August trade balance is due for release. Energy prices and
demand started to slip in August and a renewed declining in the trade surplus will not bode well for the CAD either.
Simultaneously,
Cable has stopped short of breaking through the 1.8500 key support level. Today’s release of the RICS house price balance for September showed a strong jump to 45% from 35%, its highest level since April 2004. The sales to stocks ratio rose to 38.8 from 37.3 with the RICS expecting further house price increases to come. The data continues to point to a strengthening housing market that should add to evidence of the BoE hiking rates in November. The market has priced in approximately 70% of the November move, but data such as this will allow the market to move closer towards fully pricing it in. This week’s speech by the BoE Governor should also help. He referred to an unreleased BOE study suggesting that manufacturing firms intend to raise prices. King also made it clear that broad money supply growth is now higher than at any point since 1990, citing inflation worries. Deputy governor John Gieve, who is fast gaining a reputation as a hawk, also suggested that the MPC wants to give a strong signal to wage setters’ and ‘the
MPC is determined to do whatever is needed to bring CPI inflation back to target’. Today, MPC members Besley and Sentence will be testifying to the Treasury Select Committee. Cable has potential to rebound to 1.8640/1.8700.
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