Dollar Continues Lackluster Performance Amid Disappointing U.S. Data

• Euro Tumbles Against Most Major Currencies as Bank Lending Remains Tight, Euribor Pushes Higher
• British Pound Looks for Direction as Comments by Governor Mervyn King Raises Concerns of Stagflation
• Australian Dollar Dips Back Below 200-Day SMA as Traders Pare Bank Interest Rate Expectations
• Japanese Yen Rallies as Speculation for BoJ Intervention Subside
• New Zealand Dollar to Face Whipsaw Price Action Ahead of RBNZ Rate Decision

Dollar Continues Lackluster Performance Amid Disappointing U.S. Data
The safe-haven dollar struggled for direction on Wednesday after climbing yesterday for the first time in four trading sessions. We would also see that government bonds yields pared yesterday’s advance, while the Dow Jones Industrial Average halted its four day rally. Other interesting developments to take note of were the decline in energy and metal prices. Crude oil lead the southern descent in commodities after a report showed that supplies surged 7.31 million barrels to 360.8 million in the week ending July 23rd. In turn, the data increased speculation that demand will wane for currencies that are dependent on commodities for growth such as the Aussie, Loonie, and Kiwi.

The decline in the U.S. equity markets and the pullback in the greenback against the low yielding Japanese yen, Swiss Franc, and British pound can be contributed to the disappointing durable goods orders. New orders for durable manufactured goods retreated 1.0 percent in June after tumbling a revised 0.8 percent the previous month amid economists’ expectations for a 1.0 percent rise. The report was weighed by nondefense aircraft orders which dropped 19 percent, while machinery and metal orders also decreased. At first glance, the report shows weakness in long lasting goods and in turn, the average investor will react to the data negatively without giving the figures further insight. One section of the breakdown that needs not to be overlooked is capital goods which is supportive of growth. It is also noteworthy that business investment spending is expected to remain healthy for most of this year, which is indicative of gains in durable goods.

Looking ahead, initial jobless and continuing claims will be released tomorrow. Though these events are unlikely to cause a shift in the markets, further gains in jobless claims will indicate the weight that fewer factory retooling shutdowns has placed on claims, which are typical during this time of year. Indeed, full time employment has faced major headwinds and will likely continue its southern journey as Americans look to re-enter the workforce. Nonetheless, we may see increased volatility tomorrow ahead of the gross domestic product which will be released on Friday, and will certainly guide U.S. dollar price action during the North American trade. Market participants are forecasting economic activity to scale back to 2.5 percent in the second quarter from 2.7 percent the three months through March. Indeed, economic growth is expected to remain subdued until the ending months of this year and may look to regain momentum in 2011.

Euro Tumbles Against Most Major Currencies as Bank Lending Remains Tight, Euribor Pushes Higher
The Euro displayed a lackluster performance against the U.S. dollar for the second consecutive day as traders continue to digest the recent stress tests results, while the U.S. durable goods unexpectedly pushed lower, leaving traders clueless of market direction. Meanwhile, Portugal’s government auctioned 600 million euros in 2014 bonds and 681 million euros in 2023 bonds today. Taking a closer look at the auction, the 2014 notes were issued at a yield of 3.621 percent versus 2.759 percent the previous auction, while the 2023 notes were issued at a yield of 5.377 percent, compared to 4.416 percent the previous auction. Across the economic docket, credit standards to loans jumped 11 percent, while Europe’s 3 month interbank lending rate rose to a yearly high of 0.896 percent, undermining the recent stress tests results (which should be overlooked as the tests were not demanding enough).

British Pound Looks for Direction as Comments by Governor Mervyn King Raises Concerns of Stagflation
After the GBP/USD crossed above the 200-day SMA yesterday, price action merely hovered above this moving average today after posting an intraday high of 1.5639 during the morning session following comments by Governor Mervyn King. Mr. King told MP’s that “there will come a point when we will certainly need to ease off the accelerator and return [the] Bank Rate to more normal levels,” and went onto warn that high inflation will continue to erode power through next year as the economy faces the threat of “stagflation.”

Australian Dollar Dips Back Below 200-Day SMA as Traders Pare Bank Interest Rate Expectations
The Australian dollar continued downwards, as a reversal in risk sentiment plagued the high-yielding currency on Wednesday. Given the lack of investor sentiment for a carry trade, the Aussie declined across the board against the other majors. Tonight, much attention will be paid to New Home Sales for June, which could decline as mortgage rates remain elevated. – Section written by Christopher Vecchio, DailyFX Research

Japanese Yen Rallies as Speculation for BoJ Intervention Subside
Following a slide in European and American equity markets, the Yen was up across the board, mainly against higher-yielding currencies such as the Aussie, Kiwi, and Loonie. Small business confidence continued to rise, moving to its highest level since October 2007. Nonetheless, early estimates suggest that Japanese industrial production grew at its slowest pace in more than a year, indicating that the Bank of Japan may be gearing towards further stimulus as export growth continues to cool. – Section written by Christopher Vecchio, DailyFX Research

New Zealand Dollar to Face Whipsaw Price Action Ahead of RBNZ Rate Decision
Kiwi traders will have a road bump in the Asian session today with the release of the NBNZ business confidence survey for July. This is an important indicator for economic bearings; but in reality, the market will likely overlook it. Far more important is the RBNZ rate decision that will cross the wires less than 24 hours from now. At its last meeting, the RBNZ decided to increase the Official Cash Rate by 25 basis points to 2.75 percent. Governor Alan Bollard spoke optimistically about the future of the island nation’s economy, projecting economic growth of around 3.5 percent for the remainder of 2010 and 2011. On July 15th, a yearly measure of the country’s consumer price index revealed that prices rose by 1.8 percent in the second quarter. The threat of inflation, combined with the abatement of uncertainty regarding the global financial system, clears the way for another rate hike tomorrow. Investors have priced in with 98 percent certainty another 25 point increase in the cash rate tomorrow; as a result, price action will likely be guided by the commentary accompanying the decision. Section written by Jay Steinberg, DailyFX Research

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DF-10-07-28-01