Stronger Than Expected U.S. GDP Supports Dollar
A stronger than expected U.S. Gross Domestic Product (GDP) report helped the U.S. Dollar pare earlier losses against the Euro. Overnight the EUR USD was maintaining its strength from yesterday’s hawkish comments from ECB member Weber and higher crude oil. Once the bullish GDP news was released, the Euro felt immediate selling pressure. Later in the trading session, a pledge by the International Energy Agency (IEA) and the United States to release stockpiled crude oil if necessary because of the refinery shutdown in the Gulf region helped push the Euro down further.
Based on the series of strong U.S. economic reports this week, it looks as if the U.S. economy is bottoming. Traders had been expecting the U.S. economy to begin to grow at a faster pace than the rest of the world and are finally starting to get confirmation. Skeptics point to the fact that the second quarter GDP growth took place during a period of low interest rates and federal stimulus checks. The Fed may be considering this also as they ponder the next interest rate hike. They may want to see more evidence that the U.S. economy is on solid ground before raising borrowing costs.
The hurricane in the Gulf is still a threat to the U.S. refineries in the region and the major factor behind higher crude oil this week. This may hurt the Dollars gains, but should not be significant enough to turn the long-term trend back down. Long-term traders should continue to look for opportunities to short the Euro while short-term traders have to remain flexible because of the stronger crude oil.
The USD JPY has traded in a tight range all week. Even the stronger GDP was not enough to launch it through the recent high at 110.65. Nonetheless, the stronger stock market was enough to trigger positive momentum in the USD JPY. Normally on a day with bullish news and a trending stock market, one would expect USD JPY traders’ risk appetite to increase, but today was a different story. The lack of volatility may be attributed to the holiday on Monday. Larger players may be on the sidelines until next week. Holding above 109.94 is supportive, but the market is still range bound between 108.12 and 110.65.
The GBP USD fell to a new low for the year as the U.K. housing market continued to push this economy toward a recession. On Thursday a report showed housing prices fell at the fastest pace in almost 20 years. Additional selling pressure came from the better than expected U.S. GDP report. This report showed an improving U.S. economy and pushed the Fed closer to raising rates while the Bank of England was considering cutting rates. While the Fed is likely to increase borrowing costs .25%, the BoE is considering a rate reduction of at least 1.5% before the end of the year. Expect more downside pressure as the interest rate differential will be favoring the Dollar over the Pound for a long time.
The USD CHF rallied as positive momentum in the stock market increased traders’ appetite for risk. Traders seeking higher yielding U.S. assets aggressively bought Dollars and sold Swiss Francs. Although the U.S. stock market is still subject to breaks because of the instability in the credit markets, the longer term trend remains intact. Longer-term USD CHF traders should watch for additional signs of bottoming in the U.S. economy while treating breaks as buying opportunities. Look for this pair to remain strong as long as 1.0865 holds as support. The next upside target is 1.1107 followed by 1.1300.
The USD CAD rallied sharply higher with its biggest gain in weeks as crude oil broke sharply from highs. News that the International Energy Agency and the U.S. were pledging to release oil if necessary to make up for a potential short fall in production because of the threat to production by hurricane Gustav was the main cause of the break. An early morning support base in the USD CAD was also built by the better than estimated second quarter GDP. This report showed that the U.S. economy may be growing faster than the Canadian economy. Lower crude oil and other commodities could put additional pressure on the Canadian Dollar over the long run. Continue to monitor the situation in the Gulf for higher crude oil, but be prepared if supply comes flooding into the market to stabilize the situation. The charts indicate a move to 1.0574 to 1.0610 is possible.
The AUD USD traded sideways to better most of the day on firm gold and a report that 2nd quarter capital spending increased more than forecast. Despite this sign that the economy was recovering, the Reserve Bank of Australia is still expected to lower interest rates on September 2. Some traders feel the interest rate reduction is already factored into the market. This may mean a knee jerk reaction down when the news comes out and then a short-covering rally. Traders will continue to focus on commodity prices for direction especially gold. A recovery in gold could strengthen the possibility of a rally.
The NZD USD is still holding the low for the month at .6823. Traders are focusing on the commodity markets especially gold as the New Zealand economy relies on commodity exports. Traders are hoping stronger crude oil and gold causes a spillover to other commodities such as wheat and triggers a strong rally. Currently, the best indication of a change in trend to up will occur on a breakout over .7215.