Commentary by Kathy Lien: Dollar Rallies on Strong ISM Data and Obama’s Revised GDP Forecast
Welcome to a big week in the forex markets with 3 central bank rate decisions and employment reports from the U.S. and Canada due for release. A meeting between G7 Finance Ministers and Central Bankers will also be held on Friday and Saturday (Feb 5 and 6) and any comments about the recent volatility in the currencies – which would be a more politically palatable way of saying excessive dollar strength – could have sharp ramifications for the forex market.
Dollar bulls have banked some profits ahead of what will certainly be a volatile trading week. This morning’s U.S. economic reports have been mixed with manufacturing ISM rising from 55.9 to 58.4, the highest level in the more than 5 years and construction activity, personal income and personal spending falling short of expectations. January was a good month for the manufacturing sector with activity accelerating in the U.S., U.K., Eurozone and Australia. In the U.S., a pickup in export orders, employment, supplier deliveries, production and prices contributed to faster manufacturing activity. Yet what is most impressive is that the sector is continuing to expand despite the appreciation of the U.S. dollar in December. The global pickup in manufacturing activity is largely tied to the expansion of manufacturing demand in China in the second half of 2009. However signs of a slowdown in the Asian Giant has begun to emerge and combined with dollar strength in January, it will be interesting to see if the global improvement in manufacturing can be sustained.
Personal income growth slowed to 0.4 percent in December while personal spending slowed to 0.2 percent. Incomes grew by a faster pace than expected but the upward revision to the November data put income growth lower than the previous month. Given the sharp decline in retail sales in December, the slowdown in spending was not particularly surprising. According to the PCE deflator, inflationary pressures are also up modestly. Finally construction spending fell at a much sharper rate in December which confirms the disappointments that we have seen in new and existing home sales. On balance, these reports indicate that the economy is improving albeit at a slower pace.
The dollar also benefited from the Obama Administration’s upward revision of GDP. The White House now expects the U.S. economy to grow by 2.7 percent in 2010, up from their prior forecast of 2 percent. However despite the improvement in growth, the jobless rate is expected to average 10 percent this year. Looking ahead, we expect the dollar to sustain its rally against the Japanese Yen.