Chances are the Federal Reserve will be less optimistic this week but that did not stop the dollar from edging higher on the back of declines in European and U.S. equities. This morning’s U.S. economic reports were mixed with industrial production growth accelerating to 0.6% from 0.4% and manufacturing production growth slowing from 0.5% to 0.1%. Pending home sales also dropped 5.6%, which was the largest decline in 3 years and the fourth straight month of lower sales. So while today’s economic reports may have been second tier, they paint the same picture of sluggish growth in the U.S. economy. The most important event risks for the dollar this week will be the delayed retail sales report and the FOMC decision. The Federal Reserve is not expected to alter monetary policy or its forward guidance but if consumer spending slows alongside job growth, the central bank could downgrade its description of the economy. The last time that the Fed met, they said the housing market was strengthening and the labor market is showing further improvement but unfortunately both parts of the economy have deteriorated since then and their acknowledgement could add pressure on the dollar by solidifying expectations for tapering in 2014 versus 2013.
In addition to retail sales and FOMC, a number of other important U.S. economic reports are also scheduled for release this week including Consumer Confidence, the ADP employment change, Chicago PMI and ISM manufacturing index. These reports will shed light on how weak the U.S. economy was going into the shutdown and how much damage Washington’s dysfunction had on the economy. Unfortunately we are looking for broad based disappointments with confidence hit by the government shutdown, spending slowed according to other similar reports released by the International Council of Shopping Centers and Johnson Redbook as well as softer manufacturing activity as seen in the NY and Philadelphia regions. This should make it difficult for the dollar to recover this week.
The Reserve Bank of New Zealand and the Bank of Japan also have monetary policy meetings on the calendar. Like the Fed, no changes are expected but the tone of the central banks could trigger a reaction in currencies. For the RBNZ, the recent rise in the NZD has become a concern along with unevenness in data. For the BoJ, their semiannual outlook will be released and we expect an upgrade to 2014 GDP forecasts. The 2% recovery in the Nikkei overnight helped to drive USD/JPY higher and this move was due in large part to the overnight decline in Chinese SHIBOR rates.
Forex traders should also be on the lookout for this Friday’s IMM reports from the CFTC. The delayed tallies for the weeks of October 11th and 18the are scheduled for release and they will show on how the U.S. government shutdown affected positioning and whether speculators added to their EUR/USD longs in the latest push higher.