• Dollar Climbs for the First time in Four Days but Underlying Sentiment Trends are Still Flat
• Euro Rallies against the Swiss Franc and Japanese Yen as Consumer Lending Conditions Improve
• British Pound Rallies after Retail Sales Report Supports Positive Growth Trends into 3Q
• Australian Dollar Traders Still Heavily Invested in Rate Speculation and Inflation Pressures
• Japanese Yen Tumbles as Bond Auction Signals Growing Confidence in Long-term Near Zero Rates
• New Zealand Dollar Will Likely Pay Little Head to Sentiment Data ahead of RBNZ Rate Decision
Dollar Climbs for the First time in Four Days but Underlying Sentiment Trends are Still Flat
It was another unusual day for the capital markets and the correlations that we expect to bind them. On the one hand, we would see the trade-weighted dollar index rise for the first time in four trading sessions (though not before toeing a new two-month low) while commodities suffered their worst drop since the beginning of the month. On the other, we would see government bond yields and the Dow Jones Industrial Average advanced for the fourth consecutive day. Fundamental traders will recognize that a decline for speculative-friendly crude and subsequent rise for the safe haven US dollar is a distinct sign of risk aversion. At the same time, the tumble from favored Japanese yen and Swiss franc carry currencies, along with the fourth consecutive daily advance for the markets favored gauge for investor sentiment (the Dow), is typically a vote of confidence by the ranks of the market. In essence, we have two group’s offering a very clear bearing on risk appetite and consequently contradicting each other. What are we to conclude from this unusual situation? Are correlations that are the underpinning of investor sentiment and capital flows diverging? No. While direction shows a mixed picture; there is a general consistency in the level of conviction (relatively small movements overall) for the day. During strong trends in risk appetite or risk aversion, safe havens like the dollar sync up and boost the negative correlation in price action these assets have with growth and yield-linked securities.
The neutral bearing on underlying investor sentiment is largely a consequence of this past Friday’s EU Stress Test results. The conclusions delivered by the policy officials are encouraging on the surface; but a look at the details gives plenty of reason to doubt the health of the European financial system and perhaps the sincerity of the region’s policy makers. Yet, the market seems to be unsure over whether to accept the conclusions offered or to adopt a skepticism that would revive the unwinding of risky positions that has more or less defined activity through the second quarter of the year. What is needed is a catalyst to break the stalemate. It stands to reason that the most sensitive region that Europe is the region most sensitive to changes in confidence. Funding troubles at the banking or government levels could easily undermine the credibility of the recent stress test and suggest a decline is immune to officials’ positive outlook. However, the threats don’t stop there. The speculative lines would be especially susceptible to an asset bubble or credit crisis in China; which Dagong Global (the same Chinese ratings agency that downgraded the US and most of the West just recently) says is a very real possibility. Furthermore, the general cooling of the US and global economies threatens to curb the subsequent recovery in investment. Now we wait to see what the next big push will be.
As we wait for a specific catalyst to spark fear or greed, the greenback – and to some extent risk appetite – will be guided by notable event risk from the US. Today’s docket was offering up meaningful data that required some reflection to garner a true sense of its performance. The S&P/Case-Shiller reported an acceleration in housing prices to its highest level in nearly four years. However, considering this indicator was measuring activity through May, it lagging and is still heavily influenced by the housing tax breaks that ended after that month. At the same time, the Conference Board’s consumer confidence report slipped to a five month low; but we have to consider that its decline was far smaller than the one recorded by the University of Michigan indicator. A reading of moderation is very different that one of collapse.
Related: Discuss the Dollar in the DailyFX Forum, US Dollar Awaits a Clear Bearing on Risk, Looks Ahead to 2Q GDP
Euro Rallies against the Swiss Franc and Japanese Yen as Consumer Lending Conditions Improve
The euro put in for a remarkable rally against the Swiss franc and Japanese yen Tuesday that would suggest the shared currency was perhaps posting a strong run of its own. However, to squash that notion, we merely have to look at the lack of progress on the deeply liquid EURUSD or the drop from EURGBP. Overall, the euro was actually little moved on the day, though a few fundamental developments could have been tapped by those with a bullish bias. Of particular interest were the ‘successful’ bond auctions by Spain and Hungary. The former sold 3.4 billion euros worth of debt at a significantly lower yield than its previous auction and the latter raised more than expected even after losing its IMF/ EU lifeline. However, this is fragile sentiment that can collapse anytime. What was truly interesting on the day was the 0.2 percent increase in the Euro Zone’s M3 figure. The favored inflation reading, this report would also show loans to consumers and small businesses hit a 20 month high.
British Pound Rallies after Retail Sales Report Supports Positive Growth Trends into 3Q
Confidence in the British pound is a fragile thing. Support needs to be found through fiscal stability, interest rate potential and economic expansion to support expectations that the sterling is on strong enough to catch up to its largest counterparts. Today, the single currency was provided a particularly strong boost from an oftentimes overlooked indicator. The CBI’s distributive trends report (a proprietary reading of retail activity) far outstripped expectations with a net 33 percent of respondents reporting a boost in sales – the highest reading since April 2007.
Australian Dollar Traders Still Heavily Invested in Rate Speculation and Inflation Pressures
With risk appetite trends backed by little momentum, the Australian dollar has struggled to find a foothold. However, investment currencies can receive from an underlying increase in risk appetite or speculation of a greater yield for the unit itself. In the absence of risk trends, we will look to the 2Q CPI data tonight to establish the potential for further RBA rate hikes this year. Expectations already put the readings above targets.
Japanese Yen Tumbles as Bond Auction Signals Growing Confidence in Long-term Near Zero Rates
Despite the mild breeze on confidence trends today, the Japanese yen was in for a pummeling. If this was not due to a strong urge to build risky positions or event risk (there was very little of its on the docket); then deduction would tell us that the government’s call for ministries to cut 10 percent from their budget next year and the 5-year high in JGB demand at a sale today did it. Interest rates will be depressed for a long time.
New Zealand Dollar Will Likely Pay Little Head to Sentiment Data ahead of RBNZ Rate Decision
Kiwi traders will have a road bump in the Asian session today with the release of the NBNZ business confidence survey for July. This is an important indicator for economic bearings; but in reality, the market will likely overlook it. Far more important is the RBNZ rate decision that will cross the wires less than 24 hours from now. A hike is already heavily priced in; so bets have been placed.
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Written by: John Kicklighter, Currency Strategist for DailyFX.com
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