Dollar Marks its Biggest Jump in Two Weeks, Though the Bear Trend is Still Intact Ahead of the Fed Decision

Dollar Marks its Biggest Jump in Two Weeks, Though the Bear Trend is Still Intact Ahead of the Fed Decision
Euro Holds Up to Dollar Gains as Positive Sentiment, Growth and Market Demand Fortifies Fundamentals
British Pound Slowly Retracing its Advance as Housing, Sales Data Disappoints Prior to BoE Statement
Japanese Yen May Weather the BoJ’s Monetary Policy Decision but Event’s Significance Growing
Australian Dollar Eases off its Multi-Month Highs following a Sharp Drop in Home Loans
New Zealand Dollar Weakens after Lending Activity and Housing Prices Eases

The Dollar Index notched its largest single-day advance since July 22nd. That being said, this advance for the single currency did not develop from any specific fundamental catalyst nor did it conform to risk appetite trends (indeed, US equities were well in the green). Without the support of a specific fundamental driver or the spark of fear that bolsters a need for safety, the dollar’s strength has to come under at least a shadow of doubt. This uncertainty is clearly defined in the most liquid dollar-based currency pairs. EURUSD – the most liquid asset in the world – put in for a modest reversal of Friday’s advance; but the slip has yet to take the big step towards breaking the consistent rising channel that began in June. Along similar lines, GBPUSD stalled just below 1.60 last week; but the pause has not yet encouraged a meaningful reversal. To cut down on the argument of fundamental correlation, we can further reference USDJPY. Putting a little distance between spot and a 15-year just below 85, this pair is still deep into its most recent bear phase. As such, it is not difficult to come to the conclusion that today’s dollar advance was a fluctuation within a larger trend (an unfavorable channel) that is waiting for the proper fundamental fodder to revive momentum.

Looking for a particular catalyst from the dollar’s landscape; we are looking at a potentially volatile round of event risk over the coming 24 hours. Setting aside the economic indicators that are due earlier in Tuesday’s New York session, we come to the top prepared release for the day: the Federal Open Market Committee’s (FOMC) rate decision. The central bank has not changed the benchmark rate since the last cut back in December of 2008; and they are not likely to alter this primary policy target for the foreseeable future – there is no real (or fundamental benefit) to further lower the Fed Funds rate and a hike will require both inflation as well as the promise of meaningful economic expansion. However, this does not necessarily mean the event will be a wash. Far from it. Speculation heading into the announcement is that the group will lower its growth forecasts; while the more bearish market participants are calling for an expansion of stimulus. Even if nothing happens in this scenario, you will catch a significant enough portion of the market to lead to notable price action. That being said, it is important to assess what kind outcome could accompany a scenario where the Fed lowers its forecasts and /or expands stimulus (the latter is almost certainly dependent on the former). An increase in stimulus through unusual channels (as rate cuts are off the table at this point), would theoretically support risk taking through an increase in capital accessibility; but it is equally probable that traders would smell the fear and respond with panic that interestingly enough sends capital to the safe haven dollar. As for a simple downgrade in growth forecasts, the impact on the greenback is best assessed in its role as a harbor from risk. If the outlook for economic activity were lowered, the negative impact on equities and other traditional asset classes would generally point to a redirecting of capital in assets that provide stability and liquidity – the US dollar.

Among the other economic releases scheduled for the coming 24 hours, the NFIB Small Business Confidence indicator should not be overlooked. Small businesses account for a vast majority of American jobs; so the economic importance of this report cannot be overstated.

Euro Holds Up to Dollar Gains as Positive Sentiment, Growth and Market Demand Fortifies Fundamentals

In the face of strong selling pressure against the dollar, the euro was able to hold its own amongst its other crosses. The shared currency’s stability can partially be attributed to the general impression of congestion across the FX market. However, there was also a fundamental element to the euro’s stability to come from its own economic calendar. Offering a varied look at the economic backdrop, the most visible release to cross the wires was the August reading of the Sentix investor confidence survey for the Euro Zone. According to the poll, sentiment that was just months ago reflecting panic that a financial crisis was nigh has it its highest level has returned to a 20-month high. Support for this general improvement in confidence can be tied back to another update today – the news that the ECB bought the fewest government bonds (9 million euros) in the secondary market since the group began its unusual stimulus effort back in May. Another notable update was the forecast from the Bank of France that economic activity from the second largest Euro Zone member would measure 0.3 percent in the third quarter.

British Pound Slowly Retracing its Advance as Housing, Sales Data Disappoints Prior to BoE Statement

The British pound is threatening a genuine reversal from its hold at 1.60; though a meaningful turn will depend upon the conviction of the selling (momentum). Risk appetite trends will have a meaningful impact on the sterling in general and GBPUSD in particular. However, we can’t often foretell the drivers for risk appetite. Through more fundamental channels, tomorrow’s visible trade balance will offer a moderate reading of economic health. The news that retail sales activity fooled in July (BRC) and the RICS house price balance dropped negative is more pertinent.

Japanese Yen May Weather the BoJ’s Monetary Policy Decision but Event’s Significance Growing

The Japanese yen held steady through notable event risk that included trade, economic sentiment and home loan figures – all important fundamental clues to the nation’s future. However, the BoJ rate decision could generate a little more interest. There is little expectation of a change in policy; but in reality, the central bank is being taken to task to do more to end deflation. What will they do?

Australian Dollar Eases off its Multi-Month Highs following a Sharp Drop in Home Loans

The Australian dollar has lost ground on a mixture of fundamental and risk-based considerations. It is the fundamental element that is a little ‘stickier.’ A 3.9 percent drop in home loans through the month of June was the 10th monthly decline in the past year and additional evidence that the central bank will not likely raise rates any further this year. Prior rate increases are already weighing the economy down.

New Zealand Dollar Weakens after Lending Activity and Housing Prices Eases

The kiwi dollar is yet another commodity currency that is suffering a combination of risk aversion and fundamental pain. Through the docket, the economy recorded a significant downshift in annual housing prices growth. The 4.1 percent pace was the worst since December of 2009 and a meaningful reflection of what kind of impact previous rate hikes have had. Another overlooked indicator, a 0.1 percent drop in card spending.

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Daily_Fundamentals_081010_body_Picture_3.png, Dollar Marks its Biggest Jump in Two Weeks, Though the Bear Trend is Still Intact Ahead of the Fed Decision