• Euro Recovers as Investors Link Greece’s Formal Assistance Appeal to Positive Outcome
• British Pound Stumbles as 1Q GDP Disappoints, Further Blurs the Election Outcome
• Australian Dollar Has the Wind Knocked out of it By Remark that Rates may be Near ‘Normal’
• Canadian Dollar Stumbles as Inflation Numbers Temper Heady Interest Rate Expectations
Dollar Drops for the First Time in Seven Days as Greece Aid Request Boosts Optimism
The dollar has been able to weather most of the day-to-day fluctuations in risk appetite this past week. This was more than evident in the series of six consecutive daily advances from the Dollar Index through Thursday – matching the best run for the single currency since the period ending December 22nd (before that it was the flight-to-safety rally during the height of the financial crisis). However, this mild fundamental strength wouldn’t be able to endure any significant positive shocks to the system. We saw just a shock to end the week with another episode of the Greek drama. A day after bond yields soared for the European economy and the nation’s sovereign debt rating was downgraded, government officials made an official request to tap the 45 billion euro credit line extended by the EU and IMF just a short time ago. Realistically, this is merely an appeal for assistance. The regional policy makers have yet to approve the aid and haven’t even agreed to all of the terms of a loan. So, why would investor sentiment improve on such a preliminary event? For the past few months, both the market and policymakers have been aware of the serious trouble that Greece (and by way of association, many of the Mediterranean countries) was in; but the latter group has essentially wished the problem away. A rise in confidence that thawed the credit market and bolstered global growth could have helped lift the economy out of its slump on its own; but as it is, the problem is simply too great and voicing optimism was simply ineffective. Instead, this is a move towards resolution and suggests Greece is willing to do what is necessary to fulfill its obligations. Though, without reciprocation from the EU, this tentative boost in sentiment will quickly collapse.
Through the immediate future, risk appetite is the key to dollar momentum and direction. However, as we have seen in the prior six session’s to Friday’s ill-fated correction, the currency has fundamental bearings of its own that can dampen or accelerate changes in the surrounding environment. Finding something of a foothold heading into the end of the week, there was a notable boost to interest rate expectations that helped offset a slump of pessimism over the past two weeks. In fact, overnight index swaps from Credit Suisse reported a jump in the 12-month interest rate forecast that now prices in approximately 85 basis points of tightening. The economic docket was a notable contributor to this shift. For data, the Census Bureau reported the biggest jump in home sales (26.9 percent) in 47 years. Also impressive was the biggest jump in core durable goods orders (2.8 percent) since December of 2007. And, while the housing data was skewed by a government tax incentive and business orders have yet to truly translate into consumer demand; it would help to move the needle. This calendar fodder aside though, the real rate speculation would develop through speculation that the Federal Reserve was debating selling off those assets on its balance sheet. While this isn’t the same thing as an actual rate hike, officials have said before that it would be a necessary step on that path.
Turning our attention to the future; it will be important to keep a wary eye on the headlines over the weekend. A meeting of the G-7, G-20, IMF and World Bank is taking place over the weekend. Given the representation, the move towards policy in various key countries recently and the shared interest in Greece, there is potential for meaningful policy to be drafted. As for the economic docket, a range of indicators will cross the wires; but the advanced reading of the 1Q GDP report is by far the top event risk. The world’s largest economy is expected to downshift to a 3.4 percent pace of annual expansion. This would not be exactly surprising; but it could very well undermine sensitive fundamental confidence.
Related: Discuss the US Dollar in the DailyFX Forum, Dollar Enjoys Safe Haven Status, Loses Interest Rate Potential
Euro Recovers as Investors Link Greece’s Formal Assistance Appeal to Positive Outcome
A rise in the euro after Greece made its official request for assistance is as unusual as the general boost in risk appetite across the global markets. Looking to access loans that the EU and IMF had promised little more than a week before does not ensure a safe and orderly rescue. What it does illustrate though is a willingness to address problems before they are too big to correct. Given the surge in the country’s two-year and 10-year yields to post-euro record highs of 10.566 percent and 8.959 percent respectively as well as Moody’s downgrade yesterday, Prime Minister Papandreou likely had little option. Yet, the timing could prove fortunate. With the summit in Washington over the weekend, all the world’s key policy officials can weigh in on the situation. What is the likely outcome of this situation? EU lawmakers have already said that Greece can tap its new credit lines before all the specific were ironed out. Yet, there are still hurdles to releasing the 45 billion euros; and it will be even more difficult to steer the economy under the additional conditions that will no doubt accompany the fiscal aid.
British Pound Stumbles as 1Q GDP Disappoints, Further Blurs the Election Outcome
Though the fundamental spotlight Friday was stolen by Greece; the British pound promised the top scheduled event risk. The advanced reading of the first quarter GDP report was an update on the health of Europe’s second largest economy and set the tone for the advanced group of nations as the first G-7 economy to report. Though the figures were slightly off, the data was more-or-less in line with expectations. For the three-month period, the economy grew at half the clip of the previous period (0.2 percent) while the annual figure contracted 0.3 percent against 0.1 percent expected. Where this data really counts is in the election. Brits now have to weigh fiscal prudence versus a stalled recovery.
Australian Dollar Has the Wind Knocked out of it By Remark that Rates may be Near ‘Normal’
Another of the FX market’s more dramatic moves would come from the Australian dollar. The economic docket reported import and export inflation data; but it was RBA Governor Stevens’ commentary that really roused traders. Ever sensitive to interest rate speculation, the market was spooked after the central banker suggested rates were now “pretty close” to normal and the next hike would depend on inflation.
Canadian Dollar Stumbles as Inflation Numbers Temper Heady Interest Rate Expectations
Despite the rise in risk appetite, Friday was a day of disappointment for those currencies with the highest interest potential. Following dampened growth outlook from the BoC and IMF over the past few days, the February retail sales number would come out weaker than expected (a 0.1 percent contract ex autos). Far more damaging though was the unexpected drop in the annual inflation rate to a 1.4 percent clip.
For Real Time Forex News, visit: http://www.dailyfx.com/real_time_news/
**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar
Written by: John Kicklighter, Currency Strategist for DailyFX.com
E-mail: jkicklighter@dailyfx.com
Join us at the FXCM Expo May 3rd and 4th.
