DailyFX Fundamentals 07-23-08
 
By Kathy Lien, Chief Strategist of DailyFX.com
 
●	New Zealand Dollar Hits 6 Month Low After RBNZ Rate Cut
●	Will the US Dollar Continue to Rally?
●	Euro Could Come Under Further Pressure on German IFO Report
 
New Zealand Dollar Hits 6 Month Low After RBNZ Rate Cut
 
For the first time in 5 years, the Reserve Bank of New Zealand cut
interest rates by 25bp to 8 percent and signaled that rates will be cut
even further. The futures curve is pricing in 5 rate cuts over the next
12 months and this is the first of the five.  The New Zealand economy
has been struggling and could be headed for a recession.  The dovish
comments from RBNZ Bollard will keep the currency under water for some
time.  Meanwhile the Australian and Canadian dollars have failed to
rally despite stronger than expected consumer prices.  Their weakness is
of course due to the drop in oil and gold prices.  Like the rest of the
world, inflation has hit Australia and Canada with food and energy
prices on the rise.  There is no more data from any of three commodity
producing countries this week, which means that their fluctuations will
largely be dependent upon on the fluctuations of commodity prices and
the US dollar.  
 
Will the US Dollar Continue to Rally?
 
Nothing stopped the US dollar from raking in more gains today.  The
greenback extended higher as oil prices dropped below $125 a barrel and
stock prices pushed higher.  The Federal Reserve’s Beige Book report,
which could have been a big market mover for the foreign exchange market
proved to be a nonevent as the contents remain virtually unchanged from
the prior report.  Economic activity continues to be sluggish while
price pressures are elevated or increasing, but weak demand has made it
difficult for producers or vendors to raise prices.  There is no threat
of a rate hike or a rate cut by the Federal Reserve in the near future
and that has left the US dollar at the whims of the stock and commodity
markets.  Although airline stocks have been the biggest beneficiaries of
the correction in oil, businesses and consumers alike should relish in
the stimulative effects of lower oil prices.  The housing bill is moving
its way through the House of Representatives.  The White House has
dropped its threat to veto the bill, helping to restore investor
confidence.  In case things get worse for Fannie or Freddie, the
Treasury needs the powers to bail them out before Congress goes on
recess in September.  Despite the arguments against a bailout, Fannie
and Freddie are too big to fail and the consequences would be crushing. 
Jobless claims and existing home sales are due for release tomorrow and
in all likelihood, they will only have a limited impact on the US
dollar.  Instead, the greenback will continue to rally as long as oil
prices push lower and stock prices move higher.  Also keep an eye on
gold prices because once the move in gold and the US dollar start
diverging, it may provide the first sign of a top in the dollar.  Since
last Tuesday, gold prices have fallen more than $70 or 7 percent.  The
simultaneous rise in the US dollar, rise in stock prices and fall in
gold prices confirm that the markets have grown less risk averse since
the “twin twisters” of Fannie Mae and Freddie Mac first made
landfall.  
 
Euro Could Come Under Further Pressure on German IFO Report
 
Although dollar strength is the primary reason why the Euro is trading
close to a 2 week low, it is starting to become very hard for Euro
traders to escape the reality that the Eurozone economy is
deteriorating.  Eurozone industrial new orders plunged three times more
than the market expected in the month of May as the strong euro and weak
domestic demand makes life difficult for Eurozone manufacturers.  Retail
sales in France and Italy were also weaker than expected, which
indicates that conditions there are not much better.  As a result, we
expect tomorrow’s German IFO report to be weak as these factors
continue to weigh on German business confidence.  The ECB’s commitment
to fighting inflation will come back to haunt them as the economy
continues to slow.  According to ECB member Liebscher, the central bank
is not worried.  He said that growth will weaken but remain fairly
healthy.  In 2010 there should be a slight uptrend, which for many
currency traders is the same as an eternity.  Service and manufacturing
PMI for the month of July will also be released tomorrow along with the
current account figures for May.  
 
British Pound:  Retail Sales Will Determine Whether the GBP Can Hold
Onto Gains
 
The surprisingly hawkish Bank of England minutes drove the British
pound higher against all of the major currencies.  The monetary policy
committee voted 7-1-1 to keep interest rates unchanged last month.  
Although 2 dissenters were widely expected, no one believed that one of
the dissenters would have favored a rate hike.  Besley, broke from the
mold to call for a 25bp rate hike to "to keep medium-term inflation
expectations anchored and ensure the Committee's credibility."  This
three way split highlights how difficult monetary policy decisions have
become for the Bank of England.  Their problems are the same as
everyone’s, albeit at a greater degree; inflation is hot, while growth
is not.  Retail sales are due for release tomorrow and they will play a
big role in determining whether the British pound can hold onto its
gains.  The highest level of unemployment claims since the 1990s and the
weakest level of consumer confidence in 28 years suggest that retail
sales will have dropped significantly in the month of June.  
 
USD/JPY Hits 3 Week High
 
The US dollar hit a 3 week high against the Japanese Yen.  Oil prices
fell $4 today which is positive not only for the US economy, but also
for the Japanese economy.  Since Japan imports close to 99 percent of
their oil needs, the fall in oil prices could also help to boost
domestic demand.  The Dow Jones Industrial Average rose by a mere 29
points today, leaving some traders cautious of a near term top in US
stocks.  The fate of USD/JPY at this point is almost entirely contingent
upon oil and stocks.