So far it has been a quiet week for the foreign exchange market with only secondary economic data released from the U.S. Today we have durable goods orders and new home sales, which can be important but these numbers rarely have a lasting impact on the greenback. Durable goods orders rose 0.1% in the month of August, which was stronger than expected but core durable goods orders fell 0.1%, much weaker than the market’s forecast for 1% growth.
In fact, there has been very little consistency in the performance of the U.S. dollar this morning. The greenback may have weakened against the euro, British pound and Japanese Yen over the past 12 hours but it also strengthened against the Australian and New Zealand dollars. The downtrend in the NZD gained momentum after last night’s wider than expected trade deficit. As we wrote in last night’s note, the drop in the manufacturing PMI index signaled the possibility of deterioration in trade activity but we did not expect New Zealand to report its largest trade deficit since September 2008. While the RBNZ could be annoyed by the recent release, they may not give up on their bias to raise rates next year because the widening of the deficit was largely caused by one off imports of a drilling platform and railway wagons from China. In contrast, the euro is trading well today thanks to an improvement in German and Italian consumer confidence.
New home sales are scheduled for release later this morning. Sustaining a recovery in the housing market has been one of the central bank’s top priorities. New home sales plunged in the month of July and a rebound is expected for August. With existing home sales growth slowing last month, it will be in the central bank and the economy’s interest to keep purchases of mortgage-backed securities intact. Fed President and FOMC voter Dudley will be speaking again today. Based on last week’s comments, he was on the members of the FOMC that almost certainly favored keeping asset purchases unchanged this month. When we last heard from Bullard, he expressed specific concerns about fiscal uncertainties and the growing questions around the debt ceiling and government spending. Dudley did not rule out the possibility of a reduction this year but he downplayed the significance of labor data that he says masks more modest improvements in the job market. He said changes to QE “need to be anchored in an assessment of how the economy is actually performing, how financial conditions are evolving, and how this affects the longer-term outlook and the risks around it.” While it is clear that Fed President Dudley does not support reducing asset purchases now, if Congress manages to reach a deal on the debt ceiling, come December he could be convinced otherwise. The market is looking for more dovishness from Dudley today.