Summers to the Fed? Dollar Rally Fizzles

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Market Drivers for September 13th, 2013
Nikkei newspaper reports Summers will be next Fed Chairman
Japanese officials to offset sales tax hike with stimulus
Nikkei 0.12% Europe -0.34%
Oil $111/bbl
Gold $1309/oz.

Europe and Asia:
NZD Business Manufacturing 57.5 vs. 59.5
JPY Revised Industrial Production 3.4% vs. 3.2%
EUR Employment Change -0.1% -0.2%

North America:
USD Retail Sales 8:30
USD U of M 9:55
USD Wholesale Inventories 10:00

It’s been an extraordinarily quiet night of trading in FX, punctuated only by unconfirmed reports that Larry Summers will be nominated to be the Chairman of Fed. The news caused an initial flurry dollar buying that quickly dissipated when USD/JPY ran into offers ahead of the 100.00 barrier.

The Nikkei newspaper reported that according to several sources the announcement of Larry Summers nomination will be made as early as next week. The market took off on this news on the assumption that Mr. Summers will be more hawkish in his demeanor and will likely push for a faster pace of Fed taper.

Mr. Summer’s nomination has been a lightning rod of controversy and may prove to be as serious a policy mistake for the Obama administration as its bungling of the Syria crisis. The issue with Mr. Summers is not necessarily his presumed hawkishness but rather his well known brusqueness. By nominating someone outside the current crop of Fed policy makers President Obama is breaking with tradition of continuity and the markets are very uncertain about the ramifications of this move.

Little wonder then that the dollar rally quickly evaporated as currency markets continue to reserve judgement on the matter, especially at a time when the Fed will have to deal with the very complex issue of reducing its balance sheet while at the same time making sure that US demand continues to expand.

Elsewhere the economic calendar is generally barren with only Japanese Industrial Production and European employment on the docket. Both data points beat expectations, but had little impact on trade. The focus today will be on North American session with US Retail Sales and U of M consumer confidence reports dominating Friday morning trade.

US Retail Sales are expected to rise 0.3% on a core basis and 0.5% on gross basis and if the number does indeed meet or beat forecasts it could provide a boost to USD/JPY pushing the pair towards another test of the 100.00 level. However, if the number misses the pair could quickly tumble below 99.00 as it would once again put the taper speculation in doubt by showing that both US labor and consumer weakened at the end of the summer. If US economic data does show deterioration, the Fed may not commit to the taper on fears that it could end the stimulus too early and that could prove derail any dollar rally.

Boris Schlossberg
Managing Director

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