US Dollar Marks its Sharpest Rally in Three Months but will it carry through to Friday?
>> Nov 13, 2009
• Euro Looks to Take Control of its Own Fundamental Future with 3Q GDP Numbers
• Australian Dollar at Risk of Being Pegged Fundamentally Overbought
• Japanese Yen’s Correlation to Risk has Waning as Recovery Develops
• Australian Dollar at Risk of Being Pegged Fundamentally Overbought
• Japanese Yen’s Correlation to Risk has Waning as Recovery Develops
US Dollar Marks its Sharpest Rally in Three Months but will it carry through to Friday?
The US Dollar enjoyed its most impressive daily advance in months Thursday at the expense of investor confidence. Personifying its macro role as the ubiquitous safe haven currency; the greenback would forge its biggest advance against its primary trade partner, the euro, since August 7th. And, immediately erasing any arguments that this was a currency-borne move; we saw the S&P 500 fall over one percent, gold tumble 1.2 percent and the second tier economic data on the US docket disappoint.
While the contents of today’s calendar lacked in their precedence for market-moving potential, they nonetheless offered important status updates on the economic and fiscal health of the United States. Considering the dollar’s primary function as of late is to fill in as a funding currency for strong carry flows, there are few more imperative fundamental considerations for traders than gauging its suitability in this role. Aside from the forecast for growth and interest rates (where the US actually leads many of its liquid counterparts), the preponderance of bloated deficits and record levels of government debt helps to keep the greenback on the short-side of most yield plays. The October monthly budget statement released by the Treasury added to the policy malaise. A $176.4 billion shortfall was the largest for that particular month and was the fifth largest on for any period. Looking at the breakdown, spending declined by 2.7 percent through the year while revenues and other income plunged 17.9 percent. It is clear that though officials are already moving towards a measured exit from stimulus, the impact of the recession on tax income will maintain budget deficits at extraordinary levels for years to come.
From fiscal struggle to economic recovery, the bullish outlook for the housing sector was dealt a blow by the MBA’s weekly mortgage applications report for the period ending November 6th. Though the headline reading rose 3.2 percent, filings for home purchases dropped 11.7 percent to the lowest level since December of 2000. This leads us to question whether the vital artery of growth can sustain its recovery without government assistance. The silver lining to the day was seen in employment. Initial jobless claims for ht week through November 7th fell more than expected to its lowest level since the first week of January. Continuing claims for the previous week followed suit with sharp contraction to levels not seen since early March. While these figures on their own are not confirmation of a halt to firing and rebound in hiring; they bring the US one step closer.
Looking ahead to tomorrow, the question that every trader is asking is whether the dollar will follow through on its impressive run today. Considering the currency is now on the verge of possibly turning its dominant trend (EURUSD and the Dollar Index are just off their respective channel extremes); it will likely take a considerable shift in either the dollar’s market status or underlying risk appetite to advance such a development. The University of Michigan Consumer Sentiment gauge doesn’t necessarily hold the influence needed and it is somewhat late in Friday’s session. On the other hand, the European growth numbers could make a broader appeal to sentiment. However, considering the effort required to force a breakout; it is the more probable scenario that the greenback will either retrace its gains or settle into the weekend.
Euro Looks to Take Control of its Own Fundamental Future with 3Q GDP Numbers
As a prelude to tomorrow’s heavy event risk, the European Central Bank released its monthly Survey of Professional Forecasts bulletin with a positive revision to growth. According to the report, Euro-Zone GDP is expected to contract 3.5 percent through 2009 (from a previously projection of a 4.5 percent slump) and expand 1 percent through 2010 (compared to a previous outlook of 0.3 percent). Looking ahead to Friday’s European session, we will find validity to these more optimistic forecasts in (and a much more volatile response to) the government’s first measures of 3Q growth. The most Euro Zone measures hold the greatest fundamental weight for the macro crowd; and the official consensus calls for 0.5 percent growth through the three months to officially bring the region’s recession to a close. However, the reading alone will not likely define the entire event. For volatility, the German numbers could steal the show. Scheduled for release at 7:00 GMT (a full three hours before the regional data), Europe’s largest economy is expected to have grown 0.8 percent through the period to match its fastest pace of expansion since the final quarter of 2006. Furthermore, those looking for fundamental guidance beyond just the few hours of volatility that follows the round of data will dig deeper into the performance of other members. While Germany and France have paced the global recovery, other economies like Italy and Spain (which reported a contraction of 0.3 percent today) are still struggling.
Australian Dollar at Risk of Being Pegged Fundamentally Overbought
The Australian dollar has enjoyed its status as bullish extreme of the economic and monetary policy spectrum while risk appetite extended its impressive recovery; but what happens should sentiment cool or even retrace? Thursday’s pullback in risk appetite (though leveraging a recovery for the US dollar) left the Australian currency relatively unscathed. Speculators maintain a strong fundamental and persistently hawkish interest rate outlook that has served them well over the past eight months. However, RBA Governor Glenn Stevens has already come out saying further policy adjustments will be taken in moderation. There is reason to believe him. Consumer-based inflation was at its lowest level in a decade through the third quarter and still cooling. For growth, while the net employment change for October unexpectedly rose by 24,500 positions last night; the jobless rate still ticked up to a six-year high. With the rest of the world taking its time and fundamentals developing at a moderate pace, there is reason to believe the RBA will slow; yet the market is still pricing in an 84 percent chance of a hike on December 2nd.
Japanese Yen’s Correlation to Risk has Waning as Recovery Develops
With the dollar competing for the title of the market’s favored funding currency where does that leave the Japanese yen. While benchmarks for other asset classes (stocks, commodities, etc) have all pushed to record highs, the more risk-attuned yen crosses have actually been developing long-term, broad congestion patterns. This could be in response to island nation’s economic recovery, its ballooning deficit and debt position or simply an effect of competition; but what seems clear is that this ambiguity will not last for long. Signs of lasting deflation are rising and domestic consumption is far from healthy. When US rates start to rise later down the line, it is almost a certain that Japan’s will remain untouched.
For the most up-to-date Forex analysis and news, visit: www.forexstream.dailyfx.com
**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar
The US Dollar enjoyed its most impressive daily advance in months Thursday at the expense of investor confidence. Personifying its macro role as the ubiquitous safe haven currency; the greenback would forge its biggest advance against its primary trade partner, the euro, since August 7th. And, immediately erasing any arguments that this was a currency-borne move; we saw the S&P 500 fall over one percent, gold tumble 1.2 percent and the second tier economic data on the US docket disappoint.
While the contents of today’s calendar lacked in their precedence for market-moving potential, they nonetheless offered important status updates on the economic and fiscal health of the United States. Considering the dollar’s primary function as of late is to fill in as a funding currency for strong carry flows, there are few more imperative fundamental considerations for traders than gauging its suitability in this role. Aside from the forecast for growth and interest rates (where the US actually leads many of its liquid counterparts), the preponderance of bloated deficits and record levels of government debt helps to keep the greenback on the short-side of most yield plays. The October monthly budget statement released by the Treasury added to the policy malaise. A $176.4 billion shortfall was the largest for that particular month and was the fifth largest on for any period. Looking at the breakdown, spending declined by 2.7 percent through the year while revenues and other income plunged 17.9 percent. It is clear that though officials are already moving towards a measured exit from stimulus, the impact of the recession on tax income will maintain budget deficits at extraordinary levels for years to come.
From fiscal struggle to economic recovery, the bullish outlook for the housing sector was dealt a blow by the MBA’s weekly mortgage applications report for the period ending November 6th. Though the headline reading rose 3.2 percent, filings for home purchases dropped 11.7 percent to the lowest level since December of 2000. This leads us to question whether the vital artery of growth can sustain its recovery without government assistance. The silver lining to the day was seen in employment. Initial jobless claims for ht week through November 7th fell more than expected to its lowest level since the first week of January. Continuing claims for the previous week followed suit with sharp contraction to levels not seen since early March. While these figures on their own are not confirmation of a halt to firing and rebound in hiring; they bring the US one step closer.
Looking ahead to tomorrow, the question that every trader is asking is whether the dollar will follow through on its impressive run today. Considering the currency is now on the verge of possibly turning its dominant trend (EURUSD and the Dollar Index are just off their respective channel extremes); it will likely take a considerable shift in either the dollar’s market status or underlying risk appetite to advance such a development. The University of Michigan Consumer Sentiment gauge doesn’t necessarily hold the influence needed and it is somewhat late in Friday’s session. On the other hand, the European growth numbers could make a broader appeal to sentiment. However, considering the effort required to force a breakout; it is the more probable scenario that the greenback will either retrace its gains or settle into the weekend.
Euro Looks to Take Control of its Own Fundamental Future with 3Q GDP Numbers
As a prelude to tomorrow’s heavy event risk, the European Central Bank released its monthly Survey of Professional Forecasts bulletin with a positive revision to growth. According to the report, Euro-Zone GDP is expected to contract 3.5 percent through 2009 (from a previously projection of a 4.5 percent slump) and expand 1 percent through 2010 (compared to a previous outlook of 0.3 percent). Looking ahead to Friday’s European session, we will find validity to these more optimistic forecasts in (and a much more volatile response to) the government’s first measures of 3Q growth. The most Euro Zone measures hold the greatest fundamental weight for the macro crowd; and the official consensus calls for 0.5 percent growth through the three months to officially bring the region’s recession to a close. However, the reading alone will not likely define the entire event. For volatility, the German numbers could steal the show. Scheduled for release at 7:00 GMT (a full three hours before the regional data), Europe’s largest economy is expected to have grown 0.8 percent through the period to match its fastest pace of expansion since the final quarter of 2006. Furthermore, those looking for fundamental guidance beyond just the few hours of volatility that follows the round of data will dig deeper into the performance of other members. While Germany and France have paced the global recovery, other economies like Italy and Spain (which reported a contraction of 0.3 percent today) are still struggling.
Australian Dollar at Risk of Being Pegged Fundamentally Overbought
The Australian dollar has enjoyed its status as bullish extreme of the economic and monetary policy spectrum while risk appetite extended its impressive recovery; but what happens should sentiment cool or even retrace? Thursday’s pullback in risk appetite (though leveraging a recovery for the US dollar) left the Australian currency relatively unscathed. Speculators maintain a strong fundamental and persistently hawkish interest rate outlook that has served them well over the past eight months. However, RBA Governor Glenn Stevens has already come out saying further policy adjustments will be taken in moderation. There is reason to believe him. Consumer-based inflation was at its lowest level in a decade through the third quarter and still cooling. For growth, while the net employment change for October unexpectedly rose by 24,500 positions last night; the jobless rate still ticked up to a six-year high. With the rest of the world taking its time and fundamentals developing at a moderate pace, there is reason to believe the RBA will slow; yet the market is still pricing in an 84 percent chance of a hike on December 2nd.
Japanese Yen’s Correlation to Risk has Waning as Recovery Develops
With the dollar competing for the title of the market’s favored funding currency where does that leave the Japanese yen. While benchmarks for other asset classes (stocks, commodities, etc) have all pushed to record highs, the more risk-attuned yen crosses have actually been developing long-term, broad congestion patterns. This could be in response to island nation’s economic recovery, its ballooning deficit and debt position or simply an effect of competition; but what seems clear is that this ambiguity will not last for long. Signs of lasting deflation are rising and domestic consumption is far from healthy. When US rates start to rise later down the line, it is almost a certain that Japan’s will remain untouched.
For the most up-to-date Forex analysis and news, visit: www.forexstream.dailyfx.com
**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar
