Dollar Clears Another Level of Support as Sentiment Heats Up Despite Discouraging Fundamentals

• Dollar Clears Another Level of Support as Sentiment Heats Up Despite Discouraging Fundamentals
• Euro Unperturbed by a Severe Drop in Investor Sentiment, EU’s Own Warnings Over Debt
• British Pound Finds Limited Encouragement from Inflation Readings that Could Pain BoE Doves
• Japanese Yen Further Secures its Funding Status as the BoJ Loosens its Monetary Grip
• Australian Dollar Traders Interpret RBA Minutes to Mean No More Rate Hikes in the Foreseeable Future

Dollar Clears Another Level of Support as Sentiment Heats Up Despite Discouraging Fundamentals
The benchmark US dollar tumbled for the fifth time in six days Tuesday; and there is little sign that momentum is letting up. For a standalone view of the greenback’s performance, the trade-weighted index has slide three percent over the past week to mark its lowest close since March 24th. And, amongst the majors, we can see that its relative performance is just as discouraging. The FX market’s most liquid currency pair (EURUSD) climbed another 110 points while the more risk-sensitive AUDUSD put in for an intraday bullish reversal totaling 155 points. This comparison is an important one to make because the Aussie dollar-based major is more often connected to irregular changes in speculative appetites while EURSUD’s liquidity bonds it to underlying fundamental trends that are far less volatile. On the other hand, the dollar itself is not immune to reversals. Considering the single currency advanced for nearly seven consecutive months, a meaningful correction is almost a necessity as a function of market mechanics (allowing for profit taking, raising capital to fund other positions, presenting a better level for future entry, etc). As such, the additional encouragement that a 2.4 percent rally from the S&P 500 Index encourages as a counterpoint to the greenback’s safe haven status is inevitably redundant.

However, beyond a necessary correction in an overextended security, the dollar’s fundamental appeal has diminished little since the market reversed course last week. In fact, conditions have generally deviated from the strong upswing that risk appetite has generally enjoyed this past week. Taking stock of economic and exogenous developments through Tuesday’s session, there was little to support a buildup in risky positioning. On the docket, both the Bank of Japan and Reserve Bank of Australia would project a sense of caution in their policy decisions. In European trading hours, investors’ concern over what effects financial trouble from various EU members could have on the region were demonstrated in the ZEW sentiment survey. Off the calendar, the focus was drawn back to the potential for a financial crisis born from the Euro-area. In a paper from the European Commission, it was assessed that both Portugal and Spain could see their debt troubles “snowball” if they do not take more drastic action in taming their deficits. This is not the material of optimism that feeds expectations for stability, growth and yield. Then again, neither is this news that further diminishes the outlook for general market conditions than what they were a week ago. Given the extent to which the market has discounted its forecast, a temporary retracement is well founded. That being said, there is a significant difference in the room the S&P 500 can rally before it is deemed a reversal in trend and the US dollar which has rallied for seven consecutive months.

Looking to the US economic docket for the day, the data on hand would arguably do more for the dollar itself than speculative interests. Much commotion was made of the Empire Manufacturing report; but the indicator had little discernable impact on the dollar or equity futures upon its release. This makes sense given its influence as a regional factory reading. More notable was the $83 billion net foreign investment is US assets through April according to the TICS data. This supports the nation’s (and thereby currency’s) draw as a safe haven. On a different tack, the import-level inflation report cooled to an 8.6 percent clip that could temper rate forecasts. Watch tomorrow’s PPI and industrial production data.

Euro Unperturbed by a Severe Drop in Investor Sentiment, EU’s Own Warnings Over Debt
There was neither a tangible improvement in the Eurozone’s economic health or its financial stability; and yet the euro continued to rise. The same argument that is made for the dollar retracing earlier gains can be made about the euro recovering lost ground: in the absence of terrible news, merely dour updates won’t curb a speculative recovery. However, investors’ alliances and greed can change quickly. If sentiment were to moderate or reverse course, today’s news would certainly weigh the shared currency lower. Amid better-than-expected readings for trade (for April) and employment figures (for the first quarter), the top scheduled release for the day was the ZEW investor sentiment survey for June. The forecast measure for Germany was remarkable for printing its biggest drop since October of 2008 (when the Lehman Brothers collapse had roiled the markets). Clearly, investors in the area are very concerned over the future of the European Monetary Union – and they have every right to be. Feeding concern today, the EC’s warning that debt troubles in Portugal and Spain could spiral out of control reported the former will need to cut the equivalent of 1.5 percent of GDP in the deficit to stabilize its finances next year and the latter 1.75 percent. What’s more, those members in even worse financial shape are living on borrowed time. Ireland auctioned off 1.5 billion euros in bonds with high yields and a bid-to-cover that is no doubt a reflection of ECB buying. Elsewhere, Greek debt was dropped from debt funds after following yesterday’s downgrade.

British Pound Finds Limited Encouragement from Inflation Readings that Could Pain BoE Doves
It is surprising that the British pound did not put in for a more impressive performance through Tuesday’s session. Not only was investor sentiment generally elevated; but scheduled economic data crossed the wires with a better than expected bearing. A rise in risk appetite is particularly important for the sterling as one of its greatest fundamental weights has been a fear over its sovereign credit rating – which should improve as speculative fears diminish. For the data picture, RICS House Price Balance and DCLG home price readings offered an improvement in a key economic sector. But it was the stubbornly high CPI inflation readings (at 3.4 percent) that really feed bulls through rate expectations.

Japanese Yen Further Secures its Funding Status as the BoJ Loosens its Monetary Grip
As expected, the Bank of Japan would not change its benchmark lending rate at its policy announcement on Tuesday. Yet, they would alter monetary policy. Though not a surprise given recent commentary, the central bank announced a 3 trillion yen lending facility to businesses to help boost credit and encourage the economy. In terms of effectiveness, this effort will not be much more successful than the previous facility in leveraging growth and ending deflation. On the other hand, it shows a coordination with the government to take on the daunting task.

Australian Dollar Traders Interpret RBA Minutes to Mean No More Rate Hikes in the Foreseeable Future
Interest rate expectations for the RBA’s future policy efforts were already gutted by the bank’s decision to hold the benchmark lending rate on June 1st along with their dovish commentary. The minutes from this meeting were even more discouraging with distinct reference to the fallout from the European Union’s troubles as well as the quarterly CPI reading. Currently the market is pricing in 27bps worth of hikes over 12 months.

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