US Dollar

Despite a surprisingly weak headline durable goods figure and a jump in oil prices, the US dollar gained strength and edged near its 10-day high against the Euro.  Durable goods dropped 10.2 percent last month due to a plunge in Boeing aircraft orders.  The less volatile durable goods orders excluding transportation number on the other hand rose a more than expected 0.6 percent with a 1.0 percent upward revision for orders in the month of December.  The strength in the more stable component helped to relieve some of the knee jerk dollar bearishness and suggests overall factory demand still remains solidly. 

Oil prices spiked higher Friday along with gold prices following a terrorist attack on an oil processing center in Saudi Arabia.  Even though the Saudis have quickly refuted any impact on their oil exports, the fact that Saudi Arabia is the world’s largest oil producer certainly has the market worried.  Al-Qaeda has called repeatedly for attacks on Saudi oil centers which means this may not be the last time that we hear of a shock to Saudi oil infrastructure. 

Looking forward to the week ahead, we have an extremely busy economic calendar which could very well take us out of this dull range trading environment that we have been trapped in for the past week and a half.  Here in the US, we are expecting the preliminary Q4 GDP report of which we are looking for any revisions to the previous dismal Q4 advance release, home sales figures, Consumer Confidence, Chicago PMI, Personal Spending, Personal Income, Construction Spending, both of the ISM reports and the University of Michigan Consumer Sentiment survey.

Euro

The Euro continued to grind lower throughout the US session. German consumer prices came out right in line with expectations, growing by 0.4 percent month over month in February with annualized inflation remaining unchanged at 2.1 percent, which was slightly higher than expected.  ECB officials speaking today echoed most of the same comments made by ECB President Trichet over the past few weeks.  A rate hike next week seems imminent at this point, especially following Thursday’s strong IFO survey.  There is even some speculation that the ECB could raise their inflation forecasts for 2007.  In the week ahead, there are a lot of Eurozone data due for release including more inflation reports, unemployment data, consumer confidence and German retail sales. 

Yet the highlight of the week is still the ECB’s monetary policy meeting and Trichet’s accompanying press conference on Thursday.  The rate hike itself is pretty much a given at this point which means that the main event will actually be Trichet’s speech.  The market will be looking for signs from the central bank head on whether he plans to wait a few months after the rate hike before delivering the next one, like he did last time or if he feels that the ECB will need to continue to remain vigilant with inflation which would suggest that they will be following up with another interest rate hike relatively soon.  If the ECB does remain hawkish, we could see a nice bounce in the Euro.

British Pound

The British pound lost ground against the dollar despite some more optimistic economic data.  The second release of fourth quarter GDP remained unchanged at 0.6 percent but GDP for the third quarter was revised higher form 0.4 percent to 0.5 percent.  Personal consumption and government spending both ticked higher which is encouraging and supports the case that the Bank of England may be closer to neutral than most people think.  UK department store chain John Lewis and Grocery chain Waitrose also reported strong sales last week which confirms the improvement in household spending. 

Bank of England Economist Bean warned that higher energy prices could be here to stay, which would continue to squeeze margins and inflation.  In the week ahead, unlike the rest of the world, the UK economic calendar is relative light.  We are only expecting a few pieces of housing market data, consumer confidence and the manufacturing and service sector PMI reports.  

Japanese Yen

The Japanese Yen strengthened against the dollar for the third consecutive day.  The rally has been so strong that it erased the past 3.5 weeks of losses.  In addition to the hawkish comments from Bank of Japan Governor Fukui, the central bank of China (PBoC) also announced last night plans to improve the Yuan exchange rate mechanism, which would be another step that the central bank is taking towards an eventual free float.  It has been reported that China may also be issuing Yuan bonds in Hong Kong while more funds are beginning to increase their exposure to China. 

Meanwhile adding to yesterday’s comments, Fukui said today that the conditions for removing quantitative easing continue to come into place and that they “cannot always be fearing failure.”  Regardless of what Fukui says, this is really a test of where the power of monetary policy lies.  The government has previously said that the BoJ is not independent, but the BoJ after tempering their words for a few weeks have restarted their hawkish comments in force, saying that as soon as their conditions for removing quantitative easing are met, they will proceed promptly with changing policy.

Kathy Lien