Dollar Finds Breathing Room with the First Advance in Six Days, But is it a Reversal?

Dollar Finds Breathing Room with the First Advance in Six Days, But is it a Reversal?
Euro’s Influence on Exchange Rates Diminishes ahead of ECB Rate Decision, Commentary
British Pound Ends its Strongest Run in Nearly Two Decades after Drop in Services Activity, Ahead of BoE
Japanese Yen Takes Note of Finance Minister’s Concerns about the Yen’s Appreciation, But Where is the Conviction?
Swiss Franc: Did the SNB Salvage the Economy by Intervening on Behalf of its Currency?
New Zealand Dollar Tumbles Following an Unexpected Drop in Employment and Surge in the Jobless Rate

After five consecutive daily losses, it was simply a matter of time before the dollar would put in for a bounce. However, for traders, this isolated advance should not spell the end of a very aggressive two-month decline much less the beginning of a meaningful recovery. In the broader scheme of things, the Dollar Index has lost more than half of the gains that it had fought to tally through the first half of the year in a matter of weeks. Turning the boat around under these circumstances will require a significant fundamental drive that the greenback will struggle to muster given the deterioration in the currency’s economic health and general state of risk appetite. To better understand where the dollar is at in its cycle, we merely have to look at its most liquid currency pairs. EURUSD slipped Wednesday; but the pullback from three-month highs has not threatened the consistent rising channel. Cut from a similar cloth, GBPUSD has broken a nine-day advance; but so far, this is merely an interruption from or a pause in the trend rather than a definitive turning point. And, perhaps the best evidence of underlying trend is USDJPY. Just off 15-year lows, this exemplifies dollar selling pressure without adopting the common complication of extracting the risk appetite influence.

One of the essential aspects of the dollar’s advance through the second quarter of the year was the influence that market-wide risk aversion had on price action. While this wave of uncertainty was broad enough to wash the Dow Jones Industrial Average to eight-month lows, it has clearly run dry since marking that low through the beginning of July. This week, we have seen a choppy climb progress to the point where the index has topped two months highs. However, confidence has stalled at this precipice of optimism. The uncertainty surrounding upcoming big ticket event risk plays a big part in this hesitancy. Tomorrow’s monetary policy decisions from the European Central Bank and Bank of England are modest curbs on activity; while Friday’s US NFPs is the real anchor on pre-release progress. However, traders haven’t been left to simply speculate on these forthcoming events. Sentiment was shaken today with stress test news from China. Having suffered through the United States’ and Europe’s efforts to evaluate the stability of their respective banking systems, China is now in the process of estimating its own health. And, according to an unnamed official, the nation’s main banking regulator is calling for its lenders to assess their ability to survive a 60 percent drop in housing prices. Such a scenario is dramatic and tantamount to a financial crisis for the market’s favorite outperformer. So, while this may just be an attempt by the government to ensure stability; it is interpreted by investors as worry of an impending disaster.

Bringing the focus back on the dollar itself, we would see another swing in the outcome of the scheduled macro event risk. Where personal income and spending figures contracted yesterday (weakening the outlook for consumption and growth in general), today’s ISM non-manufacturing survey for July helped to redeem some of the lost confidence. The service-sector activity report unexpectedly rose for the month, contributing a positive slant on economic expansion as this particular faction of the economy accounts for 90 percent of business output. The real interest through was in strongest reading from the employment subcomponent since December of 2007 – perhaps a precursor to the NFPs.

Euro’s Influence on Exchange Rates Diminishes ahead of ECB Rate Decision, Commentary

Though the euro would slip against the US dollar, the shared currency wasn’t necessarily faltering under its own weight. When looking at EURUSD price action, performance can be a result of strength or weakness of either one of the two currencies. It just so happens, that the liquidity in this pair is so massive that a significant move for this one major can translate into sympathy moves for the dollar and euro in their other crosses. Therefore, the euro’s underperformance today can largely be attributed to the strength of the US dollar. If we were to look at the euro’s own fundamental guidance, today’s scheduled and impromptu event risk would have supported stability. From the docket, the Euro Zone retail sales figure reported no change against a modest decline through the month of June. Buried in the headlines, Portugal raised 1.2 billion euros in six and 12-month debt at a lower yield against higher demand than previous similar auctions. What is really distracting traders though is tomorrow’s ECB rate decision. No change to the benchmark yield is expected; but the masses will once again comb through all commentary.

British Pound Ends its Strongest Run in Nearly Two Decades after Drop in Services Activity, Ahead of BoE

Having come up to a major technical resistance level (1.60), GBPUSD requires a true fundamental driver to carry the sterling to new highs. Today’s event risking wouldn’t provide. The nation’s service sector activity report for July unexpectedly dropped to a 13-month low 53.1 reading – a reading that should remind us that the UK economy is still under great strain. Looking ahead to tomorrow’s BoE rate decision; no changes are expected. However, debate over expanding stimulus to support the economy could intensify speculation around the event.

Japanese Yen Takes Note of Finance Minister’s Concerns about the Yen’s Appreciation, But Where is the Conviction?

Risk appetite was generally mixed Wednesday; and this would lead to a varying performance for the Japanese yen against its many counterparts. Trying to discount the influence of investor sentiment, USDJPY posted a strong rebound from nine-month lows. It is this pair that Japanese Finance Minister Noda refers to when he voices concern about the currency’s appreciation. But is he speaking loudly enough?

Swiss Franc: Did the SNB Salvage the Economy by Intervening on Behalf of its Currency?

Many speculators think the SNB’s attempts to intervene in the EURCHF exchange rates plunge was an utter failure. However, an article from Bloomberg points out that the central bank may have in fact bolstered growth and is in a better position for increasing its FX reserves by a factor of four in just over a year. However, regardless of their success or lack thereof, Switzerland is still heavily dependent on Europe’s performance.

New Zealand Dollar Tumbles Following an Unexpected Drop in Employment and Surge in the Jobless Rate

The New Zealand dollar can easily weather the release of economic data from its own docket as traders’ attention is often cast in some other direction (risk appetite being the primary preoccupation). Today’s employment data would break this spell. An unexpected 0.3 percent drop in the employment level and increase in the jobless rate from 6.0 percent to 6.8 percent would lead NZDUSD to a quick 80 pip tumble.

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Daily_Fundamentals_08052010_body_Picture_3.png, Dollar Finds Breathing Room with the First Advance in Six Days, But is it a Reversal?