US Dollar Down Slightly, Japanese Yen Surges as US Durable Goods Orders Fall 2.4%

Written by Hassan, Currency Strategist

• British Pound the Weakest of the Majors as GBPJPY Break Below Key Support
• Euro Consolidates Above 1.4615 Following Rise in German Consumer Confidence

US Dollar Down Slightly, Japanese Yen Surges as US Durable Goods Orders Fall 2.4%
The US dollar spent much of Friday consolidating the previous day’s moves, especially against the euro, as the currency only rose against the Canadian dollar and British pound. Meanwhile, the Japanese yen was easily the biggest gainer as some disappointing US data put a dent in prospects for a robust economic rebound. Indeed, US durable goods orders expectedly fell 2.4 percent in August, marking the steepest decline since January 2009, after surging 4.8 percent in July. The decline was led primarily by transportation, and excluding this factor, orders went unchanged from the previous month. Furthermore, capital goods orders excluding aircraft - a leading indicator for business investment - fell negative for the second consecutive month, indicating that investment remains weak and may remain so in coming months.

On the other hand, the final reading of the University of Michigan’s consumer confidence index reflected a large improvement in sentiment in September, with the index hitting a 21-month high of 73.5 from 65.7. A breakdown showed that as the “economic conditions” component rose to a 1-year high of 73.4, while the “economic outlook” jumped to a 2-year high of 73.5. Finally, US new home sales grew a slight 0.7 percent in August, bringing the annual rate up to a nearly 1-year high of 429,000. Furthermore, supply levels have come down to 7.3 months from 7.6 months, and all of this has likely been helped along by the 9.5 percent drop in median prices from July and the 11.7 percent plunge from a year ago to $195,200

Looking ahead to next Tuesday, the September reading of the Conference Board’s measure of US consumer confidence is expected to rise up to a one-year high of 57 from 54.1 in August, but overall, there are some upside risks for this report given the strong readings we saw in the University of Michigan’s measure. In light of broad sentiment that the US economic outlook is brightening, disappointing numbers could have especially negative repercussions for risk appetite, but if the index rises in line with expectations or proves to be surprisingly strong, FX carry trades could gain and weigh on the US dollar.

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

British Pound the Weakest of the Majors as GBPJPY Break Below Key Support
The British pound was the biggest loser on Friday as the currency lost 2.5 percent against the Japanese yen. Indeed, GBPJPY broke below its July lows during the Asian trading session as the Nikkei 225 tumbled 2.6 percent, and from there on out, the pair plummeted toward 143. This helped to exert even more pressure on GBPUSD, which broke below its own recent lows to settle the day just above support at 1.5928. Looking to the day’s economic news, UK total business investment was unexpectedly revised up very slightly to -10.2 percent for Q2 from -10.4 percent, while the annual rate was revised sharply lower to -21.8 percent from -18.4 percent, suggesting that businesses are not maintaining a very good outlook for the economy though the end of the year.

On the other hand, the UK will face their third and final round of growth results on Tuesday, and this upcoming GDP reading is anticipated to be revised up to -0.6 percent in Q2 from Q1, compared to previous estimates of -0.7 percent. Likewise, the year-over-year rate of growth is projected to be revised up to -5.4 percent from -5.5 percent, which would still mark a record low but would suggest that the UK’s recession isn’t quite as bad as previously though. The last time we saw news similar to this was upon the preliminary (second) release of Q2 GDP on August 28, as the quarterly rate was surprisingly revised up to -0.7 percent from -0.8 percent. At that point, the British pound rallied into the start of the US trading session, but subsequently ran into resistance and ended the day lower. This suggests that if GDP is revised higher than -0.6 percent, the British pound could gain, but ultimately, readings in line with expectations shouldn’t have a large impact on trade.

Euro Consolidates Above 1.4615 Following Rise in German Consumer Confidence
The euro managed to recover from its overnight lows to end the US trading session up slightly against the US dollar on Friday. European data was positive, as the GfK index of German consumer confidence advanced to a 16-year high of 4.3 in October from a revised reading of 3.8, adding bulk to improving outlooks for the region. Meanwhile, ECB Board member Yves Mersch said that the central bank will not implement an exit strategy until “functioning of the interbank market has been secured,” and warned that an early exit could lead to a double-dip recession as he sees a risk for lower growth potential in the near future. At the same time, Mr. Mersch expects to see a “moderate recovery” in 2010 as Germany and France emerge from the recession, but went onto say that policy makers cannot rule out the risk of a credit crunch as the financial system remains fragile. The comments suggests the ECB will maintain its current policy over the near-term in order to encourage a sustainable recovery, and is likely to keep rates unchanged at 1.00 percent as long as inflation pressures remain in check.