It is not surprising to see the dollar recover after selling off significantly in the beginning of the week. In every downtrend there will be relief rallies which is what we have witnessed today. The dollar traded higher against the euro, Australian, New Zealand and Canadian dollars, but not before each of the 3 commodity producing currencies hit fresh year to date highs. The U.S. economic calendar was once again devoid of any major economic releases, giving investors the opportunity to let their imaginations run wild. Although there are many reasons why the dollar should continue to weaken, the primary reason is the improvement in risk appetite. So if risk aversion returns and equities give back their recent gains, the relief rally in the dollar could become a full blown turn. Concerns about losses in the commercial real estate sector and the unrealistic expectations of a V shaped recovery have made investors a bit nervous. However with no major U.S. economic reports due for release this week and 2 central banks making monetary policy announcements tomorrow, we still believe that interest rate differentials will drive the currency market.
More Protectionism
Unfortunately, protectionism continues to rear its ugly head. The U.S. is now considering imposing import duties on certain seamless steel pips from China. If you recall, last month, China and the U.S. engaged in a mini trade war over tires and chickens. The U.S. slapped a 35 percent tariff on tire imports from China and in response China threatened to either restrict imports of chicken feet or tack on their own tariffs. Believe it or not, chicken feet trade between the U.S. and China is a $400 million industry. However China is much more interested in making this a public spat than an economic war because chicken feet trade pales in comparison to the $2 billion tire trade between the 2 countries. Last week, the U.S. increased tariffs on Chinese solar panels and now they are branching out to other products. Granted that steel imports are estimated to be only $382 million, but a little here and a little there becomes a lot. So far, China has only shot back with the equivalent of a BB gun, but if the U.S. continues to push them, they may retaliate with something stronger such as reluctance to continue purchasing U.S. government debt. In fact, they may not even need to follow through with it but a simple threat may be enough to shake the markets. In the end, protectionism is dollar negative by reducing foreign demand for dollars.
Employment and Spending
Although there are no major U.S. economic releases on the calendar tomorrow, there are 2 U.S reports worth watching - Jobless Claims and ICSC Chain Store Sales. After the acceleration of job losses reported last week, traders will be looking for clues to whether the trend of improvement in the labor market has ended. If jobless claims increase more than the previous week, investors could grow concerned about another month of massive job losses. In addition, there have been a lot of reports that spending this holiday season will be weak and because of that, retailers are just looking to breakeven. However, based upon the SpendingPulse index, a service by MasterCard Advisors, retail sales rebounded in September. Costco and Family Dollar Stores also posted better than expected quarterly results which give hope to Thursday's report which will include back to school spending. Meanwhile consumer credit fell for the seventh month in a row due to mounting job losses and tight credit. If not for the cash for clunkers program, the data would have been even weaker.