US Dollar Down Despite Q2 GDP Revision - Testimony from Fed Chairman Bernanke on Thursday

Published September 30th, 2009 - 11:18 GMT

•    Euro, British Pound Edge Higher in Choppy Day of Trading
•    Japanese Yen Mixed Ahead of Q3 Tankan Report

US Dollar Down Despite Q2 GDP Revision - Testimony from Fed Chairman Bernanke on Thursday
The US dollar was the weakest of the majors after a brief morning rally as US equities recovered from their session lows. Looking to the news on hand, the third and final reading of US Q2 GDP was changed to -0.7 percent from previous estimates of -1.0 percent as personal consumption, business investment, and government spending were all revised higher. The shift has added to speculation that the US emerged from recession in Q3, though it may be due almost entirely to the "cash for clunkers" program, which ended on August 24. Meanwhile, the International Monetary Fund (IMF) said in its Global Financial Stability Report that banks around the world may still need to reveal about half of their losses stemming from the financial and economic crisis, saying that credit risks remain "elevated" even though financial conditions have improved significantly since spring. While the IMF revised their forecasts for total losses in the financial system to $3,400 billion between 2007 and 2010, from the $4,000 billion estimate it announced in April, they also noted that lingering credit risks and weakened banks may keep a lid on new credit and global growth.

On Thursday, the 8:30 ET release of US personal spending is projected to show a whopping 1.1 percent rise for the month of August, which would be the highest reading in nearly 6 years. That said, the increase is likely to be due primarily to sales of durable goods like automobiles as the "cash for clunkers" drove demand for the products higher. At the same time, though, we already know that durable goods orders for the month of August slumped 2.4 percent, which may signal some risks for a disappointing personal spending result. Likewise, personal income is anticipated to rise a slight 0.1 percent, which won't do much to lift the year-over-year rate of -2.4 percent, nor will it indicate any sort of impetus for consumption to stage a strong recovery. That said, Federal Reserve Chairman Ben Bernanke will begin testimony at the House Financial Services Committee hearing at the same time, which will be part of a series of sessions on financial regulation. If Bernanke suggest that significant risks remain throughout the markets because additional regulation has not been pushed through, his comments may override any of the sentiment reflected in the personal spending and personal income reports and subsequently weigh on FX carry trades. 

Later in the morning at 10:00 ET, the ISM manufacturing index is projected to rise for the ninth straight month in September to 54 from 52.9, which would be the highest reading since April 2006. With 50 being the point of neutrality, this would also be the second month that the index signals an expansion in activity, adding to evidence that the sector is experiencing a recovery in business activity. The last release didn’t have much of an impact on the US dollar, as risk aversion dominated the day, leading the currency higher. However, the report will still be useful because of its employment component as a leading indicator for Friday’s US non-farm payrolls report.

Related Article: US Dollar Event Risk Stacked High Ahead of Consumer Confidence and NFPs

Euro, British Pound Edge Higher in Choppy Day of Trading

The euro and British pound gained against the US dollar, but were mostly weaker against the rest of the majors on Wednesday as demand really only worked in favor of the commodity dollars. There was little in the way of UK news, but the euro did gain following a European Central Bank report that showed banks only bid to borrow 75.2 billion euros at the current benchmark interest rate of 1 percent in its second 12-month auction, which was much less than anticipated, after the ECB loaned a record 442 billion euros following its first auction in June. ECB Governing Council member Marko Kranjec said that the lower demand “shows the system is liquid enough and that banks don’t need funds so much,” suggesting that the central bank's emergency liquidity measures may not be necessary for much longer.

The final reading of the purchasing managers' index (PMI) for the Euro-zone's manufacturing sector is due to be released at 4:00 ET on Thursday, but no revisions are expected. Indeed, the September result is anticipated to go unrevised from the initial reading of 49.0, which marks an improvement from August but also represents the sixteenth straight month that PMI has held below 50, signaling a continued contraction in business activity. At 4:30 ET, the UK’s manufacturing PMI is anticipated to rise to 50.2 for the month of September from 49.7, which would match the July result and signal that the sector is seeing signs of growth. However, it will take more consistent evidence anyone can claim the beleaguered economy is in recovery mode.

Related Articles: Euro Weekly Trading Forecast, British Pound Weekly Trading Forecast

Japanese Yen Mixed Ahead of Q3 Tankan Report

The Japanese yen was mixed on Wednesday, losing against the commodity dollars while gaining versus the US dollar and European currencies. For the most part, the currency has maintained its inverse link to equities, but it will face high event risk overnight as the Bank of Japan's Tankan report is projected to show mild improvements in business sentiment from Q2, but may also highlight the lingering weakness in the economy. The gauge of large manufacturers' outlooks is anticipated to edge up to -26 in Q3 from -30, but this will mark the fifth negative result and thus, broadly pessimistic sentiment. On the other hand, the non-manufacturing outlook is expected to fall to -22 in Q3 from -21, suggesting that outside of exporters, few businesses are feeling the impact of the Q2 expansion, as GDP rose an annualized 2.3 percent. Adding to the mix, the Tankan fixed investment index is projected to remain down 9 percent in Q3, compared to -9.4 percent in Q2 and -6.6 percent in Q1, indicating that businesses are still not planning on spending as corporate profits are still weak and most outlooks call for lackluster growth in the region through the end of the year.

Related Article: Japanese Yen Weekly Trading Forecast

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Written by: Terri Belkas, Currency Strategist for



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