Dollar Enjoys a Modest Bounce During Holiday Periods, How Will it Perform When Risk Trends Return

• Euro Responds to Better Investor Sentiment and Retail Sales Data, Awaits Dollar for True Trend
• British Pound Slips as Budget Cuts Threaten Already Anemic Growth in the UK
• Australian Dollar Traders Await a Signal from the RBA, Expectations are Already Restrained
• New Zealand Dollar Dulls on Risk Appetite, Looks for Business Confidence to Support Rate Policy

Dollar Enjoys a Modest Bounce During Holiday Periods, How Will it Perform When Risk Trends Return
It is a practice of academic and speculative interest to see how the currency markets develop when a major liquidity provider is offline. Monday marks the extension of the Fourth of July holiday for the United States; and as such, a significant segment of the world’s trading and investment capital is absent. If the speculative interests of the US market participant were not important; we could have seen a significant run from the FX market (low liquidity can often translate into high volatility). However, as we can see from currency, equity, commodity and debt markets, few are willing to take a meaningful stance on underlying risk trends for fear of the market shifting in the opposite direction when conditions level out over the coming session. Deciphering how sentiment will develop over the coming 24 hours requires an assessment of how things developed last week – even before liquidity started to drain before Friday’s NFPs release. Looking to the standard bearers for risk appetite, it was hard to miss the plunge in equities that lead the benchmark Dow Jones Industrial Average and S&P 500 to previously contested levels of support and trade at new lows for the year late last week. The hope that confidence has somehow reversed course over the weekend is diminished by the fact that European equities are generally lower while the Canadian S&P/TSX Composite (a proxy for the US market when it is offline) fell nearly one percent on the quiet session.

Looking for catalysts to revive the risk appetite/aversion conflict that constantly defines price action, there are far few precedents to easily follow. The ECB’s liquidity facility rollover has come and gone, China has already tempered expectations for activity with a warning from the Premier along with a discouraging leading indicators composite, and the top market-moving economic indicator (NFPs) has passed with little more than a hiccup. This week, there are few definitive events that we can reasonably expect to have a dramatic influence over all the markets. Despite what recent price action may insinuate, the reduced demand for liquidity with the rollover of lending facilities last week represents nothing more than a marginal improvement in credit conditions for the region. A sour turn for risk appetite will almost certainly amplify pessimism surrounding the region and thereby offer a medium for risk aversion to spread throughout the currency market. The market’s insight into the Europe and the health of the euro itself is vital for the short-term performance of the greenback itself. The simultaneous tumble in equities and dollar last week was an unusual turn of events that could be traced back to the temporary relief from fear that the Euro Zone was on the verge of a financial crisis. This lowered the dollar’s value as a safe haven; but more importantly, the fact that EURUSD is the world’s most liquid currency pair helped to reverse the anticipated reaction this pair has to sentiment trends. This confidence in the euro cannot last for long without a meaningful swing in confidence or an ongoing improvement in the financial data from the region.

Outside the gravity of risk appetite, the US dollar will have tangible fundamental drivers to work with this week in the form of event risk. For the coming 24 hours, the return of liquidity will be met with the ISM’s non-manufacturing (service) sector activity report for June. This indicator does not have the same clout that its manufacturing counterpart has; but in fact, this reading is a better reflection of the United States’ health considering services account for the greatest portion of economic activity for the nation. The headline figure is expected to cool modestly; which in itself is further confirmation that the world’s largest economy is leveling off and is in danger of perhaps marking a quarter or two of contraction in the future. Of particular interest from this report is the employment component as most US jobs are service based.

Euro Responds to Better Investor Sentiment and Retail Sales Data, Awaits Dollar for True Trend
With sentiment trends relatively sedate, the euro would enjoy a break from dramatic changes in price action or strong trends in either direction. However, that does not mean the currency will be able to carry this level of passivity forward when liquidity fills out tomorrow. Taking advantage of the lull, EU Economic and Monetary Affairs Commissioner Rehn tried to thwart the search for cracks in officials’ plans to stabilize the region in comments that they would not press Greece to make any further austerity cuts for the time being. This was good timing considering Greek Finance Minister Papaconstantinou just recently commented that he hoped to be able to access the debt markets by 2011. Given the nation extra room to maneuver, he said that would be able to hold off until 2012 with the assistance they currently had and that he did not consider the notes auction due this month as a “return” to the market. From an economic perspective on the region’s health, consumer spending seemed to fair well through May as Euro Zone retail sales reportedly grew 0.2 percent despite the height of financial troubles during that period. Similarly encouraging, the regional Sentix investor sentiment report improved for a second month, thought net pessimism remained..

British Pound Slips as Budget Cuts Threaten Already Anemic Growth in the UK

There is still some bullishness to be found for the pound in policy officials’ efforts to cut the budget and secure the nation’s top credit rating. However, it is important to remember that this will not come without its detriments. One of the immediate problems for the UK in the face of considering spending cuts is the impact it will have on economic activity. Today, the service sector activity report for June offered a taste of this pinch with a bigger-than-expected slip to a 54.4 reading. This was the lowest reading from the series in 10 months. What’s more, a look at the details showed a record low in executive confidence. It will be a rocky road for the British economy going forward.

Australian Dollar Traders Await a Signal from the RBA, Expectations are Already Restrained

The top event risk over the coming 24 hours is without doubt the RBA’s rate decision. Neither the market nor economists believe this event will end with a change to the benchmark rate; but that isn’t where speculative interests end. Accompanying commentary could boost or diminish interest rate expectations for the rest of the year. As it stands, the outlook for the next 12 months stands at no change from the current rate.

New Zealand Dollar Dulls on Risk Appetite, Looks for Business Confidence to Support Rate Policy

Few indicators from the New Zealand docket have a major impact on price action. This is because the currency’s place as a permanent investment (high-yield) currency keeps it locked into underlying sentiment trends. However, the second quarter business sentiment survey could provide a meaningful shift in growth and interest rate expectations; and therefore it could be a short-term driver for the kiwi.

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