FX Carry Trade Direction Hinges Upon Proof of Global Economic Recovery

Published August 22nd, 2009 - 12:17 GMT

The US dollar and Japanese yen were hammered lower on Friday as comments from Fed Chairman Bernanke spurred optimism that the global economy is on its way out of recession. A variety of growth indicators due to be released from the US and UK next week may determine how sound that argument is, and thus, the next move for the US dollar and Japanese yen.

•    US Conference Board Consumer Confidence (AUG) – August 25, 10:00 ET
The August reading of the Conference Board’s measure of US consumer confidence is expected to rise slightly to 47.8 from 46.6 in July, but overall, there are some downside risks for this report. Indeed, preliminary readings of the University of Michigan’s consumer confidence index show that sentiment soured in August, with the index hitting a 5-month low of 63.2 from 66.0, as the “economic conditions” component dove down to 64.9 from 70.5, while the “economic outlook” slipped to 62.1 from 63.2. Furthermore, the latest consumption results were disappointing, as advance retail sales, excluding autos, fell 0.6 percent in July. Disappointing numbers could have especially negative repercussions for risk appetite, especially as Friday’s rally in equities and carry trades was due to speculation that the US economy is making its way out of recession.

•    US Durable Goods Orders (JUL) – August 26, 8:30 ET
The upcoming release of US durable goods orders is projected to show a 3.0 percent increase in July following a 2.5 percent drop in June, but excluding transportation the index is forecasted to only rise by 0.8 percent. While the headline result will have the most impact on forex trading, the markets should keep an eye on non-defense capital goods orders excluding aircraft, as this number serves as a leading indicator for business investment.  This component has improved over the past two months, and a continuation of this dynamic would be supportive of outlooks for a slow and steady recovery in the US economy.

•    US Gross Domestic Product (2Q P ) – August 27, 8:30 ET
The second round of US Q2 GDP estimates is due to hit the wires, but the results will only be market-moving if we see revisions. The preliminary reading is forecasted to be revised down to -1.4 percent from -1.0 percent, though this would still represent a sharp improvement from Q1, when GDP plunged 6.4 percent. Readings in line with expectations may not have a very big impact on price action, but better-than-anticipated results could lead carry trades higher, especially in light of speculation that the recession may have ended in Q2. On the flip side, surprisingly weak numbers could crush these hopes and trigger the return of risk aversion.

•    UK Gross Domestic Product (2Q P) – August 28, 4:30 ET
The UK will also face a second round of growth results, but Q2 GDP is not anticipated to be revised from previous estimates of a 0.8 percent quarterly contraction and a 5.6 percent annual contraction, the worst since recordkeeping began in 1955. The economic decline was led by a 2.2 percent drop in construction and a 0.7 percent slump in business services and finance, and the updated figures aren’t likely to show much of a change in this. That said, with the Bank of England’s latest meeting minutes showing that three Monetary Policy Committee members, including BOE Governor Mervyn King, voted in favor of a larger increase to their quantitative easing program than was actually implemented, a steeper than expected decline could lead the markets to price in another QE expansion at the end of the year and push the British pound lower.

•    US Personal Income, Personal Spending (JUL) – August 28, 8:30 ET
Upcoming income and consumption data for the US is projected to reflect fairly lackluster results on the economy. First, personal income in anticipated to rise by 0.1 percent for the month of July, but it is worth noting that past increases in income have been due purely to surging transfer payments, which include government benefits like unemployment, while wage and salary growth has fallen steadily (-4.7 percent in June from a year ago). Next, personal spending is forecasted to rise by 0.2 percent for the third straight month in July, but based on the steep decline we saw in consumer confidence during that period, this reading could be somewhat disappointing. If this is indeed the case, the US dollar could gain slightly on flight-to-safety. On the other hand, surprisingly strong results could hammer the currency even lower as carry trade demand rises.

See the DailyFX Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators.

Send questions or comments to tbelkas@dailyfx.com

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