Talking Points
JPY Machine Orders rebound less than expected
JPY Eco Watchers in line
UK Visible Trade Balance deficit widens
CAD Housing on tap
Euro, Pound Yen Target Key Numbers
Dollar strength continued for the second consecutive day as most of the participants returned to the market after a multitude of global holidays kept many dealing desks at half staff yesterday. Ostensibly the theme of the day was safe haven flows which pushed speculative capital towards the greenback in the wake of North Korean test of nuclear weapons over the week-end. However, intelligence analysis now suggests that the North Korean test may not have been a full scale nuclear detonation after all as the amount o seismic activity surrounding the blast was relatively tame. In short, the North Korean threat may not be as grave as originally thought. With the North Koreans now signaling willingness to negotiate, the whole exercise may have been nothing more than a giant game of geo-political bluff.
So why is the dollar rallying? Watching the price action it appears to us that most of tonights movement in the majors is driven more by momentum trading rather than any underlying fundamental factors. With EUR/USD tantalizingly close to the 1.2500 level, USD/JPY within striking distance of 120.00 and GBP/USD approaching 1.8500 the temptation to run stops must be extremely strong. If and when the majors reach those targets, their performance at those price levels will provide clear evidence of whether tonights action is nothing more than just another sharp rally in the midst of a larger range or a true sign of dollar strength.
On the economic front, the Eco Watchers survey in Japan printed above the 50 boom/bust level for the second month in a row suggesting that Japanese economy continues to expand at a healthy pace. Over the past two years upturns in the Eco Watchers reports have been accurate forecasters of future yen strength. While this indicator can certainly falter this time, it nevertheless indicates that a turn in USD/JPY may be coming soon. In UK on the other hand economic news was decidedly less sanguine as Visible Trade Balance widened more than expected and sparked fears that any additional rate hikes by BOE would cause further deterioration in the export competitiveness of UK industry and will widen the trade deficit even more. The pound in turn dropped 100 points as traders pared their expectations of a November rate hike.
