Morning Commentary: King Dollar

Foreign Exchange - Morning Commentary

King Dollar

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Alan Rose
Alan Rose
Foreign Exchange Head Trader
Equity markets are closing the week on a weak note once again as weak and disappointing data from China and the EZ have sent global equities indices to lower levels. The weak equity performance is rippling through interest rates, commodity prices, and sending the U.S. dollar index (DXY) to much higher levels against all the majors and emerging market currencies.  The one exception is the Japanese yen.  
Weak and disappointing economic data from China and the EZ are at the source of the anxiety about data that continues to point towards a global economic slowdown while the U.S. economy continues to remain buoyant (see retail sales below). Chinese retail sales for November posted their worst performance since May 2003 and industrial production declined to 5.4% annually. Equally disappointing was the December EZ PMI which dropped to 51.3 from 52.7; that is the lowest level in more than four years. French data was particularly weak at 49.3 which is below the key 50.0 level that indicates a contracting economy.
The DXY index is near to its best level of the year today. The strong U.S. dollar, the U.S. trade deficit, and a weakening global economy will only add to headwinds for the U.S. economy going forward and complicate the Fed’s decision for next week. U.S. exceptionalism regarding growth above its peer group continues to provide the back drop for the Fed to raise interest rates for the ninth time next week. The Fed will need to use all its magical powers to thread the needle through actions and language and strike the right balance so the markets do not go through a continuing melt down.
  • The Russian central bank unexpectedly raised interest rates by 25 bps to 7.75% this morning. The rate increase is seen as supporting the weakening Russian ruble and inflation data that is approaching the upper limit of 4.0%.
  • U.S. economic data continues to remain very resilient. Retail sales for November came slightly above expectations at 0.2% and October was revised higher from 0.8% to 1.1%. The “control group” number within the general number was particularly strong at 0.9% against estimates of a gain of 0.4%. Industrial production for November was also strong at 0.6% against consensus estimates of a gain of 0.3%. U.S. interest rates are lower on the session reflecting equity weakness.
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