The dollar continues to reel from last week's 50-basis
point Fed rate cut, falling overnight to a fresh record low
against the euro at 1.4129 and stumbling versus the
sterling to 2.0316. Renewed fears of a faltering US economy
will continue to drive the foreign exchange market this
week as concerns of a possible recession weigh on the
greenback. However, given the abrupt nature of the Fed's
aggressive ease, traders must keep a close eye on US
inflation data for fear that the 50-basis point rate cut
may strengthen inflationary pressure over the coming
quarters.
Economic data slated for release this week will provide
further clues on the US outlook, with reports to shed light
on growth, the housing market, inflation, manufacturing,
and consumer sentiment. On the whole, consensus estimates
look for weaker data compared with the previous releases.
The housing market slump will continue to lead the
deterioration in US fundamentals, with August existing home
sales seen falling to 5.49 million units, versus 5.75
million units previously and new home sales forecasted to
drop to 830k units compared with 870k units in July. The
final reading of Q2 GDP is estimated to be revised lower to
3.9%, from 4.0%, while the Fed's preferred gauge on
inflation is seen unchanged in Q2 with core PCE standing
pat at 1.3%. Additionally, durable goods orders and Chicago
PMI will provide more clues on the extent of the slowdown
in manufacturing. Although durable goods orders are
typically a volatile figure, estimates are calling for the
number to fall by 3.1% in August, reversing the previous
month's 6.0% increase. The excluding transports reading is
also seen declining, down by 1% versus a 3.8% gain a month
earlier.
With additional monetary policy easing expected from the
Fed this year, particular emphasis will be placed on the
outlooks for central bank decisions from the ECB, BoE and
BoJ. Among the banks, only the ECB is expected to maintain
its current tightening cycle with another 25-basis point
rate hike before year-end. However, economic data from the
Eurozone will be closely scrutinized to assess the impact
thus far on the region's economy from previous rate hikes.
Traders will turn to Germany's September Ifo sentiment
survey, due out early Tuesday morning at 4:00 AM, and is
seen softening from August. The September Ifo expectations
component is seen declining to 99.5, down from 100.4, while
the current conditions figure is forecasted to fall to 111
versus 111.5.
Meanwhile, both the Bank of Japan and the Bank of England
are expected to leave policy unchanged for the remainder of
the year given the current global and domestic economic
outlook. The BoE is even anticipated to cut rates given
tightening credit conditions and the impact of global
financial volatility on the UK economy. Later in the week,
traders will digest Q2 UK GDP, seen unchanged at 0.7% q/q
and 3.0% y/y.
A barrage of Japanese economic data is due out this week
and will provide further clues as to if and when the BoJ
may raise rates again. Our view is for the Bank to remain
on hold until Q1 2008. The reports slated for release
include the August labor report, retail sales,
manufacturing PMI, CPI, housing spending, industrial
production, and housing starts. With exceptions in
household spending and industrial production, the reports
are largely unchanged from the prior readings. However,
industrial production is estimated to post a strong gain,
improving by 3.2% in August versus a 0.4% decline in the
previous month. Household spending is forecasted to gain by
1.2% compared with a 0.1% decline in the prior month.
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