Dollar Rallies as Chinese Growth, European Finances Stoke Demand for Stability, Liquidity

• Dollar Rallies as Chinese Growth, European Finances Stoke Demand for Stability, Liquidity
• Euro to be Put to the Test as 442 Billion ECB Facility Set to Expire, Stress Test Results Surface
• British Pound Showing its Own Brand of Fundamental Strength as Sentiment Sours
• Swiss Franc Surges to New Record High Versus Euro as Unique Safe Haven Appeal Intensifies
• Canadian Dollar Plunges Owing to Risk Sensitivity, Fundamental Traders Turn to GDP Number

Dollar Rallies as Chinese Growth, European Finances Stoke Demand for Stability, Liquidity
Given the performance of the US economic data on tap for the day, it was clear that the US dollar was fully engaged in its safe haven function. The bearing and intensity for risk appetite was quite clear. Taking stock of the most straightforward and investor-friendly asset class, the UK’s FTSE 100 fell 3.1 percent through the European session while the S&P 500 dropped 3.1 percent and the Nasdaq Composite careened 3.9 percent (the biggest daily loss for the index since February 17th, 2009). With a clear buy or sell mentality (there is far less short-selling interest in this asset class), the stock market was a good representation of speculative want. On the flip side of that coin, the flux in capital would boost Treasuries and fill money market funds. With the score laid out for us, it was easy to see the same general sentiments at work in the currency market. Those currencies considered to be high-yielding or fundamentally unstable would come under the greatest pressure; while those considered particularly liquid or backed by a robust financial market were bid higher. The greenback was settled on the second extreme. On a trade-weighted basis, the currency advanced for the second day to further stave off a larger reversal of its seven-month bull trend. On an individual basis however, we can start to see its clout slipping. While the dollar put in for a remarkable performance against the Australian, New Zealand and Canadian dollars; the gains against the economically questionable euro and British pound were relatively small.

The impetus for today’s tumble in sentiment was the collection of a few particular catalysts set against the backdrop of a long-brewing fear of financial calamity. In many market participants’ eyes, this morning’s tumble was sparked by a sharp downgrade in an indicator considered a decent forecasting tool for the Chinese economy. Adjusting for a calculation error, the Conference Board’s April Leading Indicators index for the world’s second largest economy rose a modest 0.3 percent (versus a previous reading of 1.7 percent growth). Why is this indicator so important? The relevance of this particular report is in its reflection of the health of an economy that has essentially paced the global recovery and a market that has stood as a bulwark for the bullish. The diminishment of this icon of strength bodes poorly for the market at large; but in truth, it would not provide the necessary momentum to reflect the borderline panic that evolved. Feeding fuel to the fire was the concern that the European Union could soon trigger another worldwide financial crisis. With the ECB’s 12-month lending facility due to expire on Thursday, European banks will see a massive outflow of capital from their coffers. If many of these critical players in the financial game board are already in danger, then this could set off a true disaster. Come tomorrow, we could get a sense for how fragile the system really is.

Considering we would see a rise in fear in the Asian session and a fresh bout of concern in the European hours; it only made sense that we would complete the picture with negative reports during US trading hours. Yet, for this session, the concern was based on something more tangible than conjecture and deep analysis. The top US economic release for the day was the Conference Board’s Consumer Confidence survey for June. Expected to suffer a modest decline, the report instead printed a 9.8 point decline to a 52.9 reading. Considering the consumer accounts for approximately three-quarters of output for the world’s largest economy, this was certainly a disconcerting number. Looking into the breakdown of the report, the cause for this concern was obvious. With the present conditions gauge already low, it was the expectations component that really toppled. The forecasts for employment, wages and business activity all slipped. The real concern for the US economy though was the 15-year low in the percentage of American’s planning to make a purchase of a major appliance in the next six months.

Euro to be Put to the Test as 442 Billion ECB Facility Set to Expire, Stress Test Results Surface
There was a round of notable economic data on the euro’s docket Tuesday; but that wasn’t the true driver of price action for the currency. A brief review of the calendar fodder, the Eurozone’s economic confidence and business climate gauges unexpectedly rose for the month of June. The former bounced back towards a 27-month high while the latter matched its own 25-month high. This was a surprise outcome given the progression of the financial troubles in the region and the adoption of austerity cuts amongst many member economies. Nonetheless, to immediately quell any hope of a positive bearing on the European area’s outlook, market participants would once again turn to their concerns over the health of the capital and credit markets for local economies. News reports today quoted unnamed sources that said three major German banks had passed their stress tests. However, Germany’s banks are not the concern. Spain, Portugal, Greece and other underperformers are the true concern. What’s more, these assessments were said not to include sovereign credit risk; which the EU recommends. What will genuinely complicate things in the near future is the expiration of the 12-month LTRO facility which will draw 442 billion euros from the banking system. This program expires July 1st; but the three-month facility is set for auction tomorrow. How much debt will banks have to roll over?

British Pound Showing its Own Brand of Fundamental Strength as Sentiment Sours
While the pound had a clear bearing against those currencies that are at the extremes of the risk spectrum; against the mid-set US dollar, the sterling actually had a robust showing through the day. This in itself suggests the single currency is climbing the ladder with an improved sense of stability. Adding to that sense today, net consumer credit grew 300 million pounds and the M4 money supply grew the most in four months. And, showing austerity is not simply a recipe for recession, the government announced a fund aimed at helping those firms hardest hit by cuts.

Swiss Franc Surges to New Record High Versus Euro as Unique Safe Haven Appeal Intensifies
In the past few years, the ranks have changed for which currency was the best safe haven currency. The Japanese yen is a funding currency and thereby appreciates when carry positions are unwound; but both the dollar and franc are considered safe havens. Currently USDCHF is steeped in a progressive decline. Rate forecasts likely help this situation; but the connections to the Eurozone can quickly change things.

Canadian Dollar Plunges Owing to Risk Sensitivity, Fundamental Traders Turn to GDP Number
Not a few months ago, the Canadian dollar could weather most downturns in sentiment. With high rate prospects and strong growth forecasts, this currency was fortified. However, that has changed dramatically with the BoC’s plans and a cooling in global economic output. That puts the loonie at jeopardy with a GDP reading for April due tomorrow and possible second wave in risk appetite rising from the blue.

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