Dollar Tests a New Two Month Low as a Gloomy FOMC Forecasts Takes over for Risk Trends

• Dollar Tests a New Two Month Low as a Gloomy FOMC Forecasts Takes over for Risk Trends
• Euro Struggles to Hold onto Gains Spanish Banks Bombard the ECB, Debt Auctions Test Demand
• British Pound Wins a Second Rally and New Highs on Strong Employment Data
• Japanese Yen Traders Prepare for the Implications of a BoJ Hold or Even a Move to Loosen Policy
• Australian Dollar Undermined by Consumer Sentiment, Perhaps Inflation Expectations will Help

Dollar Tests a New Two Month Low as a Gloomy FOMC Forecasts Takes over for Risk Trends
There was a distinct contrast in risk appetite trends between today and yesterday; and yet, the US dollar would maintain its bearish course to set a fresh two-year low. There is no doubt that the greenback is still considered a favored safe haven amongst the currency crowd; but that role has worked against the dollar over the past few weeks; and it would provide no advantage in today’s session. On the back of the aggressive surge in speculative interest the previous day, the Dow Jones Industrial Average (one of the favored barometers for risk appetite given its simplicity) climbed for a seventh consecutive day. However, the climb Wednesday was slight as momentum backed off in the face of continued troubles from financial and economic sources. For global sentiment, the focus was once again on European finances. Like yesterday, there was another mixed day for news; and investors would have to determine whether the net outcome was one of optimism or pessimism. Once again, a round of government bond auctions would meat sufficient demand; but the cost and confidence in the sales were questionable. Less subjective was the news that the Spanish banks required a record level of loans from the ECB in June, suggesting the market is closing off to another important EU member. Perhaps this was sufficient enough to curb the steady progress of risk appetite; but it was not enough to reverse course. That may not be the case though should sovereign troubles take hold or the threat of a financial crisis in another area of the world (China) gain traction.

With sentiment easing, the dollar’s buoyancy should have increased. That would have likely been the case had economic data and the minutes from the Federal Open Market Committee’s (FOMC) last rate decision not added to the currency’s burden. In the early morning hours of the US trading session, market participants were eagerly awaiting the top tier retail sales report. The June reading was already set relatively low with a consensus forecast for a 0.3 percent drop in spending to follow up on the previous month’s 1.1 percent contraction. The official 0.5 percent decline was worse than expected and confirmed the first back-to-back decline in the series since the first quarter of last year (notably during the tail-end of the financial crisis and recession). Looking into the details of the data, some may find comfort in the more moderate performance when auto, gasoline and building materials are excluded; but these are in fact important expenditures for the economy as a whole. For those that simply took stock of the retail report and moved on; they would have missed a few other important measures that gave an overall view of the economy’s health. For housing, the weekly MBA mortgage applications measure reported the weakest demand for home purchase loans in 13 years – suggesting the sector is in a dire state. Furthermore, business inventories grew at their slowest pace this year in May and important inflation cooled markedly.

For the savvy fundamentalist, this above collection of data offers a clear assessment of the future. But, analysis wasn’t even necessary today as the Fed would doe the legwork for the masses. The decision on monetary policy was not a concern as the same tack and explanation has been given for many months now. What was noteworthy was the quarterly update to the group’s official forecasts. Confirming what many had already assessed, the central bank projected a slower rate of economic growth in the coming years than was previously calculated. For 2010, the range of 3.2 to 3.7 percent growth offered in April was lowered to 3.0 to 3.5 percent. Along similar lines, the 2011 outlook dropped from 3.4 to 4.5 percent down to 3.5 to 4.2 percent. We will see whether these expectations bear weight with tonight’s Chinese 2Q GDP reading and the same gauge for the US due two weeks from now. Perhaps the most surprising note from this statement: the mention of “some risk of deflation.”

Euro Struggles to Hold onto Gains Spanish Banks Bombard the ECB, Debt Auctions Test Demand
It was another mixed day for fundamental news for the euro; and traders would ultimately have to decide how it would ultimately impact the assessment of the region and its assets. Potentially mirroring the positive sentiment won with the ‘successful’ Greek government bond auction yesterday, three EU members would find demand for their own debt today. Germany would raise 4.3 billion euros (though at a higher yield) while Italy sold 6.76 billion euros in three different tenors. The truly interesting sale, however, was made by Portugal. Despite a two-level downgrade by Moody’s yesterday, the government still managed to draw 877 million euros. It is worth mentioning (as we did with Greece yesterday) that the rate the government had to pay was much higher and demand did decline. If this were the only activity for the day, the shared currency could have continued to rise. Yet, the additional news from the Bank of Spain that the nation’s banks borrowed a record 126 billion euros from the ECB (more than a quarter of the lending to all of Europe) throws another wrench in the speculative cogs. An overwhelming level of capital has been committed to helping European governments that struggle; but what happens if private sources near a crisis?

British Pound Wins a Second Rally and New Highs on Strong Employment Data
There are inevitably negative side effects to the austerity measures that the United Kingdom is taking to secure its financial position. Namely, economic activity will likely suffer. This is the concern Brits had when they were polled by the Nationwide confidence survey which reported its biggest drop since July 2008 and subsequently dipped to its lowest overall reading in a year. The low liquidity in the time period this data was released would curb the influence it would have; but the same was not true for the labor data. Jobless claims dropped for a fifth month (20,800) and the ILO unemployment rate matched its lowest level in 11 months. This adds a growth element to fiscal health and expected rate activity.

Japanese Yen Traders Prepare for the Implications of a BoJ Hold or Even a Move to Loosen Policy
Conditions in the Japanese economy and financial sector have obviously deteriorated in the past month. And, adding to the trouble that is born from a split decision to focus on growth or credit health, the government no longer enjoys a majority to pass legislation. Will the BoJ step up to the plate to make a decisive mark on the nation’s future? We will find out today when the central bank announces its policy decision.

Australian Dollar Undermined by Consumer Sentiment, Perhaps Inflation Expectations will Help
It seems conditions in Australia are better than initially thought. According to Treasurer Swan, the budget surplus over the coming three years will be greater than expected at A$3.1 billion over. Perhaps consumers are on board with this optimism as the Westpac confidence survey reported its biggest increase in 11 months. Now let’s see if inflation expectations can support interest rate hopes for the speculatively-inclined.

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