Dollar’s Strength Most Prominent against a Weak Euro as Spending Rises, Activity Dulls

• Dollar’s Strength Most Prominent against a Weak Euro as Spending Rises, Activity Dulls
• Euro Falters as Inflation Cools, Greek Debt Sold and European Bank Loans Come Due
• British Pound Charges ahead after BoE Member Raises the Call for Rate Hikes
• New Zealand Dollar Advance Rebuffed Yet Again following Drop in Business Confidence
• Japanese Yen Offers Mixed Performance as Risk Trends, Data Blur Outlook

Dollar’s Strength Most Prominent against a Weak Euro as Spending Rises, Activity Dulls
The US dollar was not weak Monday; but neither was is particularly strong. Much like the underperformance of equities through the day, the fundamental and speculative interest for the benchmark currency was relatively mute. This is not to mean though that nothing of substance had occurred on the day. In fact, exactly the opposite is true. The news headlines and economic data on tap were particularly important for the medium and long-term health of the currency and financial markets in general. Yet, considering investors are far less sensitive to the ebb and flow of crisis banter, the stress would be prominent only for those pairs that are most exposed to the uncertainty that lies ahead. In this assessment, it was easy to mark the EURUSD’s tumble as the greenback’s best performance. This pair’s first decline in four sessions carried over to the Dollar Index, helping this benchmark avoid a critical break below 85.20/00. Alternatively, the performance for the risk-sensitive commodity bloc was far more reserved as the AUDUSD and USDCAD pairs more closely tracked the performance of the S&P 500 and other benchmark equity indexes. A discouraging sign for diehard dollar bulls were the gains that both the Swiss franc and British pound made against the standard-bearer. Individually, the sterling is slowly overtaking the dollar from a fundamental perspective as the currency is finding greater strength in interest rate expectations and fiscal responsibility; while the franc is proving a more attractive safe haven to the euro.

Nonetheless, the dollar would still base much of its positive performance for the day on a tempering in risk appetite. Though there was not much expected, the G-20 meeting in Canada over the weekend presented the off chance for leaders from the world’s largest economies to coordinate their efforts to either stabilize growth or reign in deficits. In the end, the consensus would hold for individual economies to maintain stimulus as they see fit. On the other hand, some clarity would be offered with the group agreeing to an objective to halve national deficits by 2013. From an investors’ perspective, this is tantamount to maintaining stimulus (easy money) through the immediate future along with the promise of fiscal responsibility further down the line. However, this is only as encouraging as speculators would consider it to be. The fallout of another potential financial crisis would only be exacerbated by those economies that withdrew the safety net too soon. On this front, the European Union is still the primary concern. And, in fact, the region presents a greater threat this week than it did his past week. With the end of the month, Greek sovereign debt will have to be dropped from indexes; and, more importantly, a large liquidity facility for regional banks is due to expire.

With investor sentiment more or less balanced to start the week, scheduled event risk should have had a greater influence over price action. Alas, stability in risk appetite frequently acts as an anchor on the dollar itself. Nonetheless, the economic readings for the day were particularly influential. Top event risk was the Commerce Department’s readings for personal income and spending for the month of May. Wages rose slightly less than was expected at 0.4 percent for the month (following an upwardly revised 0.5 percent performance in April). Yet, more critical to jumpstarting economic activity, spending grew a greater-than-expected 0.2 percent. As consumer spending accounts for approximately three-quarters of economic activity in the world’s largest economy, this is a promising report. Alternatively, the Chicago Fed’s National Activity Index for the same month would disappoint. The underappreciated growth forecast (an amalgamation of 85, preexisting figures and reports) printed a 0.21 reading that was less than the market consensus. At the same time, it was still the third consecutive positive reading and not particularly far from the three-and-a-half year high set in March.

Euro Falters as Inflation Cools, Greek Debt Sold and European Bank Loans Come Due
The euro was exceptionally weak against most of its primary counterparts Monday. Assessing the situation, the biggest percentage declines would be tallied in EURCHF, EURGBP and EURUSD (in that order). This relative performance tells us that the euro was under pressure from a risk perspective (with the safe haven dollar and franc appreciating) as well as for its lack of fundamental potential (against the sterling). Those trying to assign the euro’s troubles to the data on the calendar would only see half of the story. The German consumer inflation and Euro Zone money supply figures were certainly important. The German price gauge cooled to a 1.2 percent annual clip (well below the ECB’s target two percent); while the regional M3 report (the central bank’s favored inflation reading) marked deflation for the seventh month. This curtails any hope of rate hikes in the near future. More important than these indicators are the countdowns for the week. By the month’s end, indexes with sovereign debt exposure will have to dump their Greek holdings due to its junk status. Perhaps the greater threat is the expiration of the ECB’s LTRO program on July 1st. This will require regional banks to buy bank 442 billion euros in bonds. We will cover this more in depth tomorrow.

British Pound Charges ahead after BoE Member Raises the Call for Rate Hikes
Without the influence of exogenous event risk, the British pound would have most likely experienced a choppy performance on the day. The only economic data on tap was the Hometrack Housing Survey for June; and the lesser housing report would merely tick higher on an annual basis (2.1 percent growth) in its release well before actual trading began in London. Far more interesting for traders was the commentary from MPC member Andrew Sentance. The central bank reportedly suggested that the budget changes didn’t remove the need for a rate hike and a gradual increase would be better than a disruptively large increase later down the line. This is yet further evidence the BoE will move before the Fed.

New Zealand Dollar Advance Rebuffed Yet Again following Drop in Business Confidence
In an otherwise restrained day for the risk-sensitive currencies and asset classes, the kiwi dollar would put in for a remarkable performance. The currency tumbled against both safe havens and high-yield peers Monday after a survey reported a significant drop in business confidence. The headline figure dropped to a five-month low 40.2 while investment, employment and profit expectations took similar dives.

Japanese Yen Offers Mixed Performance as Risk Trends, Data Blur Outlook
If it weren’t for the yen’s deeply engrained role as a funding currency, it would very likely suffer for its own fundamental struggles. Early Monday, data revealed retail sales dropped 2 percent in May, leading the annual gauge to cool to a 2.8 percent pace of growth. Adding to this burden Tuesday morning, household spending reportedly dropped 0.7 percent and the unemployment rate rose to a 5.2 percent clip.

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