Dollar Advances a Second Day on Stagnant Risk Trends, Awaiting Greek Bond Sale and Chinese GDP

• Dollar Advances a Second Day on Stagnant Risk Trends, Awaiting Greek Bond Sale and Chinese GDP
• Euro Stable Despite Growing Concern Over Stress Test Reaction, Upcoming Greek Debt Sale
• British Pound’s Prospects Deteriorate after Standard & Poor’s Warning, CPI Data Poses Threat
• Japanese Yen Adds Fundamental Anchor to Risk Concerns as Ratings Agencies Warn after Election
• Canadian Dollar Steady Despite Positive 2Q Credit Conditions and Sales Forecasts

Dollar Advances a Second Day on Stagnant Risk Trends, Awaiting Greek Bond Sale and Chinese GDP
The dollar climbed for a second consecutive trading day Monday; but this strength should not be ascribed to a particular fundamental catalyst that bolsters the appeal of US assets or the need for safety. In effect, the currency’s strength can be largely attributed to the fact that there hasn’t been an overwhelming drive in either of these provisions in nearly a month. However, this period of implicit stability won’t likely last for long. Though the economic calendar may seem relatively light over the coming week; the expected speculative and fundamental event risk (non indicator based releases) over the coming days threatens to provoke concern in those areas that are particularly important for the greenback. Before covering the forthcoming threats, we should assess the market’s health today. As a simple gauge of underlying investor sentiment, the benchmark equity indexes were little changed through the close of the active US trading session. Confirming the lack of conviction this would imply, commodities and bond yields were similarly directionless. In this placid backdrop, the dollar has found room to retrace some of the losses it has tallied over the past month. To truly build momentum and solidify its advance, the greenback will most likely turn to the balance in fear and greed in the global financial community to gather its bearings. Suggesting there is reason to doubt that an orderly recovery in capital turnover and economic growth is inevitable, ratings agencies issued warnings on two major economic players today. Both Standard & Poor’s and Moody’s warned Japan could find its sovereign rating lowered, while just the former ratings group set a negative outlook for the United Kingdom. Another distinct concern to arise was the specter of a Chinese financial crisis that policy officials themselves must also fear considering the PBoC announced its intentions to deposit 30 billion yuan with commercial lenders for six months.

Despite how prolific and damaging sovereign credit downgrades or the bursting of a Chinese asset bubble would be; the risk these scenarios entail is more or less ignored as investors keep the focus on near-term concerns. To unsettle volatility now would require a catalyst that is more timely and comprehensible. The scheduled debt auction for Greece tomorrow is an exposed nerve for the speculative markets. An exceptionally high yield or poor demand could spell a lack of confidence in one of the most at-risk economies in the European Union and thereby the world. And, in this capacity, Greece could spark the same level of uncertainty that swept over the capital markets back in April and May. Another potentially high-impact episode is the release of second quarter earnings data for US companies over the coming weeks. There is little doubt that the perceived surge in income and earnings for US financial institutions this past year was essential to the upswing in sentiment. That being said, clever accounting and deferred losses have contributed significantly to the recorded performance of past quarters. Will these institutions book record more of their losses in their second quarter reports? This week, JPMorgan Chase, Bank of America and Citigroup are all expected to produce results. Should there be a problem with any one of these major firms or a notable downturn in the data in general, expect risk appetite to take a turn of its own. What’s more, these figures will further build an interest in economic activity. Starting the round of 2Q GDP numbers off, China will release its statistics on Thursday; and the UK will follow next week with the US scheduled to report at the end of the month.

In the meantime, we should not ignore commentary and indicators that may be a little less headline-prone. Tomorrow’s calendar carries a small business confidence report, trade balance and the national budget statement. Small businesses account for the majority of jobs in the US; and the fiscal focus of the world’s investors has leveraged the importance a sizable deficit carries.

Euro Stable Despite Growing Concern Over Stress Test Reaction, Upcoming Greek Debt Sale
It no longer seems that a lack of news in regards to European economic and financial trouble can be leveraged as a source of strength for the euro. Despite the absence of a blatant threat to health of the region today, the euro would retreat across the board. Perhaps it was the non-specific concerns voiced today by key commentators. Keeping up a busy schedule, Standard & Poor’s issued a warning that concerns over sovereign debt could threaten the refinancing of $3 trillion worth of European bank and government debt through 2013. An equally ambiguous but far-reaching threat came from the European Commission. According to Bloomberg, a confidential letter was sent by the group to government officials that warned that a lack of disclosure on stress tests could be interpreted as a sign of trouble. These are still vague threats however until the damage is calculable or more press is dedicated to the issues. A tangible hazard is tomorrow’s Greek debt sale. The country plans on selling 1.25 billion euros in six-month bills tomorrow. A yield above 5 percent or lack of demand could easily be interpreted as a failure by a nervous crowd. And, should we need a little boost, there is always the German and Eurozone ZEW investor sentiment surveys to contend with.

British Pound’s Prospects Deteriorate after Standard & Poor’s Warning, CPI Data Poses Threat
The silver lining that had developed for the British pound over the past weeks is quickly becoming tarnished. Growth has never really impressed; but the final reading of 1Q GDP lowered the bar even further with a 0.3 percent pickup over the three months. As for financial uncertainty, Standard & Poor’s deferred from the rosy picture Moody’s and Fitch presented for the United Kingdom’s future. The group affirmed the economy’s top credit rating but lowered its outlook to negative. The last region of speculative hope then is rates. MPC member Posen reiterated his warning that the UK could slip back into recession. If inflation pressures ease tomorrow, there will be little chance of hike this year.

Japanese Yen Adds Fundamental Anchor to Risk Concerns as Ratings Agencies Warn after Election
An upper parliamentary election held in Japan this past weekend could have undermine the effort to stabilize the world’s second largest economy. The DPJ lost its majority in the critical governmental body – meaning legislation aimed at tightening government spending could be more difficult to pass. This threatens the recently announced plans to rein in the deficit; a fact that Moody’s and Standard & Poor’s alluded to.

Canadian Dollar Steady Despite Positive 2Q Credit Conditions and Sales Forecasts
Interest rate expectations may have cooled; but long-term fundamentals continue to improve for Canada. The Bank of Canada issued notable indicators of expected credit heath and sales activity for the coming quarter. The BOS sales report may have cooled from a 44 percent to 25 reading; but moderation solidifies the potential in its expansion. Furthermore, a -25 reading on the SLOS figure offers eased credit conditions.

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