Lower Energy Prices Give Much Needed Strength To U.S. Dollar

This week was much quieter as far as the volume of news as opposed to last week.  The Aussies, in fact, get to take this week off, while major news didn’t come for the USD until the Friday, and even though the numbers weren’t great it turns out to be some pretty decent news for the dollar. Several nations only had a few minor reports, but while there might have been far less reports coming out this week, that doesn’t mean the news wasn’t important or strong in affecting the world Foreign Exchange Markets.

Weekly Update:

Swiss trade surplus even bigger than expected…

The first major report to come out this week was the Swiss releasing their July trade balance report.  The land of chocolate, clocks, and quality banking continues to do well.  The predicted trade surplus for Switzerland was 1.6 billion CHF, but turned out to be much higher at 2.41 billion CHF.  This was excellent news for the Swiss currency, and while many nations are struggling, the Swiss seem to be riding through with the least turbulence to this point: but it is a long flight yet.

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To the neighbors

The Euro had some reports released this week, the most important coming in the form of the “German IFO Business Climate,” a report gauging the overall health of the economy and business while measuring confidence. This combination is used to get a decent idea of what the economy surrounding the Euro is doing and what projections can be made from that.

This report showed that German confidence in business was falling based and the higher costs of credit and slowing growth. The business indicator fell from 101.3 down to 97.5, and is the lowest rating in nearly three years. Some of the main concerns cited were the slow down of a growing world economy, the ECB raising the benchmark rate to 4.25%, and rising energy and raw material prices.

As an additional irony, the strength of the Euro is making European exports less competitive internationally. This lack of confidence is a little disturbing, but there are a lot of things that could happen in the market to turn this negative sentiment around, especially if oil prices continue to drop.

Across the Isle

This was a very busy week for the British Pound (GBP). The Bank of England released minutes to their meeting, and revealed a split on the interest rate decision, but still strong support for keeping interest rates steady by a 7-1-1 vote. One member voted for an interest rate hike, another for an interest hike decrease, but the majority felt that maintaining the current rate of 5.0%.

Britain has been fighting through a housing slump of their own, and are choosing for now to fight inflation over stimulating economic growth.

In addition to the minutes of the Bank of England rate decision, the British retail sales report was also released his week. Retail sales fell 3.9% in June, and the total retail sales were reported to have fallen to their lowest levels in nearly 20 years, bringing up fears of a recession. Inflation has risen 3.8% in the year so far, as well. Although the pound looks strong, there are a lot of problems boiling up with the British economy. While the reports for June didn’t look good, for the year to date retail is still doing relatively strong, although fuel and economic concerns continue to cloud the horizon.

Even with the drop in June, it is important to note that sales volume in the three months prior to June was still 4.4% higher than in the same period a year ago. 

The Gross Domestic Product (GDP) reports were also released, indicating that for the second quarter the GDP was up a meager .2%, the lowest amount since the first quarter of 2005. The British economy is still growing, but it’s definitely at a snail’s crawl. Analysts added to the bad news by reporting that growth is set to plunge even lower, and that there was a good chance that Britain would be in an outright recession by the end of the year.

As far as the year-to-date numbers, the UK’s GDP falls to 1.6%, which is the lowest rate since 2001. The economy for the United Kingdom seems to be on a steady march towards recession, which is definitely cause for concern and something that bears watching.

Meanwhile Across the Pond…

The United States had few high level reports this week, not having a “major” report come out until Friday, and for once the USD gets a breather. The news wasn’t overwhelming, but it was definitely positive as the numbers far exceeded expectations.

The U.S. released the “durable good orders” report, as well as the newest housing data.  The durable goods report showed that new orders for U.S. made goods swung surprisingly upwards, giving some positive news to a currency that has badly needed some good news in recent times. The demand for durable good actually rose 0.8%, which is far above the expected -0.3% that the majority of analysts expected.

The very good news continued for the USD when the home sales report came out.  Usually you don’t expect good news after a month where home sales fall to a decade low, but there is some good news behind that headline. The housing market did indeed decline again, falling 0.6%, but this was far less than the expected 1.5% decline that was forecasted. Because of this change of nearly a full point, there is renewed hope that the housing market, and many parts of the economy attached, might not be in as bad shape as previously thought, or may even be on the verge of recovery.

So even though housing is at a ten year low, that low level of decline was good news that helped the USD finish the week strong instead of weak, and rallying many of the other markets, as well.

Busy week for the Maple Leaves, eh?

Canada had two major reports released this week that have a strong effect on the Canadian Dollar (CAD). Canada released reports on both retail sales, as well as the updated consumer price index.

On Tuesday the retail sales report is released, and it showed that although Canada’s economy is still running strong, consumers are beginning to feel the impact from rising energy prices world wide, as well as inflation, and the jump in costs of credit. The statistics released on this report showed that retail rates rose, but not as strongly as economists had expected. A raise of 0.4% still showed growth, but was short of the anticipated 0.6% growth most were expecting.

This isn’t a major disappointment as growth still took place and the decline is fairly modest. The economy is still in a far better place than the United States, and there isn’t any reason to think the CAD won’t continue to be in a position of strength.

Canada’s CPI showed that consumer prices have rose a full 3.1% in the last twelve months, giving a little bit of concern since that number was only at 2.2% in May. That June increase was the largest since September 2005. A lot of this comes from the worldwide rise in energy costs, which is affecting everything from air transportation to bakery goods. Even so, this is a smaller increase than what many other nations are facing right now.

To the Land of the Rising Sun

Japan released reports this week on trade surplus and CPI. Unfortunately, the news wasn’t very good for this island of the Far East. Japan’s trade surplus shrunk nearly 75%, falling down to 138.6 billion yen from the expected 506 billion yen. Much of this was due to a -1.7% export decline, the first net loss Japan has seen since 2003. Since this was the tenth straight month exports to the United States shrank, there’s concern that there might not be any quick turn around for this problem.

Beyond the exports to the U.S., what was surprising was the sheer drop in the amount of exports to China and Europe, as well. The numbers give an indication that this slump may continue for quite some time.

The inflation reports didn’t bring much better news. Japan’s inflation rose to a ten year high of 1.9%. The gain matched the average estimate of economists, but still spells bad news as it shows not only a large jump in inflation, but also is slowing down the economy in Japan by discouraging consumer spending.

Surprise News for the Kiwi

The Bank of New Zealand surprised many with their announcement to cut interest rates by 25 basis points, to 8.00%. This is the first rate cut in five years, and was taken as an action towards fighting the accelerating recession. The bank pointed to greater than expected risks to economic growth and tightening international credit conditions.

Currency wise, this caused the NDZ to decline to its lowest rate in six months. Stuck between a rock and a hard place of inflation and recession, it looks like the bank has recognized the bad position of the economy and is taking some hits now to try and encourage the type of growth that could pull them out of this situation – but don’t expect a major bounce back anytime soon.

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