• Dollar Holds Off from Reversing Bear Trend as Dow Slips Back Below 10,000
• Euro Encouraged by Speculative Sentiment, Successful Portuguese Debt Auction
• British Pound Encouraged by Fiscal Policy Vows, Traders Turn to Thursday’s BoE Decision
• New Zealand Dollar Posts Tempered Rally after RBNZ Announces Hike, Hawkish Commentary
• Australian Dollar Undermined by Confidence Data, Will Employment Data Compensate?
Dollar Holds Off from Reversing Bear Trend as Dow Slips Back Below 10,000
A cursory review of the financial markets’ performance Wednesday would leave us with the assessment that investor sentiment was on the rise. While, technically, the growth-linked asset classes report positive gains for the day; there was something clearly lacking that is essential in establishing a true trend: conviction. Upon closer inspection we see that most of the customary benchmarks for the various markets were actually confined to broader congestion patterns. For the trade-weighted Dollar Index, the second consecutive daily decline stalled at 87.40 – the same level that had restrained the currency’s progress in the three weeks through June 3rd. In similar fashion, the world’s most liquid currency pair (EURUSD) would go so far as to test the descending trendline of daily highs going back to May 3rd before losing its momentum. What’s more, this descending ceiling on price action is well below the pair’s historical mid-point at 1.2130. Looking outside the FX market, the same constraint could be established in the capital markets as well. For equities, the Dow Jones Industrial Average temporarily climbed above the psychologically important 10,000 level before retracing its gains and ending the session in the red. And, despite the remarkable performance for the active NYMEX oil futures contract, it would nonetheless hold well within its three-week range capped around $75. In this performance, we are reminded that volatility is still exceptionally high; yet, the dominant bear trend is still firmly rooted. It just so happens that we are going through a period of congestion whereby the market is more responsive to fits of optimistic news.
Where would speculators find optimism in the market’s today? An inkling of confidence would develop early in the Asian session with the early release of China’s economic data for May. Of particular interest was the more than 50 percent increase noted in exports year-over-year as well as the 3.1 percent pace of inflation. These are indicators of rapid expansion; and yet, the many believe the nation will not take further steps to slow its economy (what has been the standard for high return among international investor over the past few years). Carrying through to European trading hours, there was no notable degradation in the EU’s fiscal and economic health – an increasingly rare occasion these days. And, helping to reduce the concern of imminent sovereign credit risk, the warning rating agency Fitch released over the stability of the United Kingdom’s national rating seemed fully offset by the same officials’ words of confidence in the new government’s vows to bridle the nation’s fiscal irresponsibility. The US session would carry the positive sentiment even further. In his morning testimony to the House Budget Committee, Fed Chairman Ben Bernanke noted that economic recovery (though controlled) was still on pace and he did not see the European crisis significantly impacting US growth unless investor sentiment destabilized. The Beige Book’s report that the 12 Fed districts all expanded would compliment this optimism.
Yet, before risk appetite would become carried away, both the World Bank and IMF delivered words of caution. The former’s Global Economic Prospect report noted that a double dip recession could not be written off and central Asia was at risk due to slowing growth and high debt. From the IMF, warnings of growing risks, “subdued” growth from the developed nations and limited stimulus capabilities retained uncertainty.
Related: Discuss the US Dollar in the DailyFX Forum, Dollar Advance Requires Greater Forecast Differentials, More Fear
Euro Encouraged by Speculative Sentiment, Successful Portuguese Debt Auction
If there is any currency that can benefit from an encouraging turn in investor sentiment, it is the euro. Not only is the currency severely depressed through concern over the region’s growth and the permanence of its strained Union; but investor optimism further helps member governments through lowering their financing costs through debt auctions (a point that is perhaps too frequently overlooked nowadays). Taking advantage of the good will today, Portugal auctioned off 701 million euros in three-year notes for a bid-to-cover of 2.4 (previously there was bids for only 1.6 times the offering). This buoyancy was so helpful that it would help to distract from the weak recovery the Hungarian markets have made since the gaff of sounding the default alarm this past Friday and data that showed that Greece had contracted 0.7 percent in the first quarter on a 9 percent drop in government spending. Tomorrow is a new day though; and the fundamental offerings are substantial. On deck is an ECB rate decision. There is next to no chance of a rate hike or a clear sign for when hawkish policy will return. However, there is speculation that the central bank will use the event to take further steps to stabilize the region’s markets.
British Pound Encouraged by Fiscal Policy Vows, Traders Turn to Thursday’s BoE Decision
Just as quickly as yesterday’s warning from Fitch that the United Kingdom was at risk of losing its top credit rating unless it did more than the April budget had laid out could send the pound reeling; the same group has offered a vote of confidence in the new government’s vows to get the nation’s finances under control and helped the currency recover lost ground. Adding to their ambitious plans today, Chancellor of the Exchequer George Osborne said the government was looking to follow the same path blazed by Canada in the 1990’s to put its finances and economy back in order. With this in mind, we will look to tomorrow’s Bank of England rate decision for clues as to what monetary policy can add to the picture. Like the ECB, no changes in policy or blatant signs for timing a rate shift are expected. Yet, the MPC could very well fine tune its own controls in response to the EU’s recent troubles or to the UK government’s efforts.
New Zealand Dollar Posts Tempered Rally after RBNZ Announces Hike, Hawkish Commentary
A quarter-percent rate hike was already heavily expected by academics and market participants. What the masses were really interested in was the commentary that would signal the pace of further tightening. Indeed, we would see a 25 bps hike to 2.75 percent; but it was the relatively hawkish bias that interested trades the most. Governor Bollard said further hikes depend on the economy; but he would raise growth expectations significantly. Furthermore, his short-term inflation forecast nearly doubled. This could offer a follow up hike on July 28th.
Australian Dollar Undermined by Confidence Data, Will Employment Data Compensate?
While Australia’s economy and benchmark yield is still very strong, its relative advantage is slowly slipping. Data Wednesday morning showed consumer confidence hit a one-year low and home loans dropped a seventh consecutive month. The forthcoming employment change data could heighten or temper the Aussie dollar’s sensitive to risk trends by moving it on the risk spectrum.
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
