• Dollar Holds Out Against a Strong Rally in Equities with Help from the Euro
• Euro Finds Little Benefit in Risk Rebound after News of Iran’s Sale
• British Pound Traders Find Rate Expectations Tempered by BoE’s Annual Report
• Japanese Yen Plunges on Prime Minister’s Resignation, Tepid Pace of Capital Spending
• Canadian Dollar Primed for Friday’s Employment Data, Outcome May Be a Surprise
Dollar Holds Out Against a Strong Rally in Equities with Help from the Euro
We have moved in the fundamental low point of the week. After two days of heavy scheduled event risk, the economic docket looks to thin out until Friday’s fireworks. What does this mean for dollar? A lack of predictable and remarkable event risk lowers the expectation for short-term volatility and probability for a meaningful push in underlying sentiment to be founded on the basis of an indicator. Furthermore, the dollar and its risky counterparts will be caught in the gravity of Friday’s nonfarm payrolls (NFP) release and the start of the G-20 meeting in South Korea. More often than not, the capital markets will refrain from trend developments before major event risk. And, for those instances of significant price developments in the run up to major events like these, the push is usually made in such a way that it would have the less consequence for dominant trends. Therefore, a EURUSD break below recent support and historical midpoint at 1.2125 is far less likely than a rally back above 1.23 that would actually relieve some of the tension ahead of the release. That being said, the dollar itself has worked its way into congestion that demands resolution. Looking to the Dollar Index, the single currency has developed a ceiling at 14-month highs while the general bull trend that has been in place since mid April continues to raise the floor on swing lows. These ‘perfect setups’ whereby technicals are setting up a key fundamental trigger or vice versa are more common than one would expect from efficient markets.
Bringing our attention back to the present, Wednesday’s performance was remarkable for what didn’t happen rather than what did happen. While the greenback has enjoyed its role as a safe haven currency these past months, the flip side of this coin is it will depreciate as risk appetite recovers. Testing this theory, US equities put in for an impressive performance though the day with a steady gain that would end with a surge through the close that pushed the Dow Jones Industrial Average to a 2.3 percent rally to 10,250 and the S&P 500 advanced 2.6 percent to 1,098. However, despite the notable improvement in investor sentiment this rally would imply, the dollar would move very little. Helping the single currency hold its ground was news that Iran was looking to diversify away from the euro and invest the proceeds into dollars and gold. Naturally, this provides a direct boost to the dollar. Though, more importantly, this effort undermines the perceived stability of the euro as an international store of wealth. Not only does the euro’s weakness bolster its primary counterpart; but this occasion simply furthers the concept that currencies are not as stable as many had believe and liquidity comes at a premium.
From investor opinion to fundamental health, the economic docket was relatively light of top-tier indicators; but the data that would cross the wires was notable. Pending home sales for April is a lagging report to the existing and new sales reports; but what it lacks in timing it makes up for it for scope. The broadest reading of activity for the sector, the 24.6 percent reading of annual growth in the series reflects stability and a true recovery for what was the source of the United States worst recession in recent history and the trigger for the biggest global financial crisis on the books. However, giving us reason for caution, the MBA mortgage applications numbers for the week ending May 28th reported loans for purchases sunk to its lowest since 1997 while refinancing hit a seven month high. There is clearly a long way to go before the world’s largest economy is back on pace.
Related: Discuss the US Dollar in the DailyFX Forum, Dollar Awaits Direction on Risk Appetite to Establish its Next Trend
Euro Finds Little Benefit in Risk Rebound after News of Iran’s Sale
No news is not good news for the euro. Already under considerable strain by a market that is skeptical over the region’s ability to avoid a double dip recession, financial crisis and even a possible fragmentation of the relatively new monetary union; investors need some sort of promise to reinvest their capital in the unbalanced economy. Making matters worse Wednesday, news that Iran is looking to unload 45 billion euros from its reserves further diminishes the single currency’s ability to elicit confidence. Just a short-time ago, China was taken to task to refute rumors that it was considering diversifying away from European assets. And, while Iran is not the investor that China is, the continued speculation and fear that long-term and deep-pocketed investors are starting to give up on the euro further wears on the speculative crowd that is only concerned about short-term gain and loss. At the root of the problem, the financial uncertainties for the economy continued today. Attempting to fill its budget deficit, Greece announced plans to sell off its stakes in railway and water companies as well as the post office. This collective unloading is expected to pull in 3 billion euros. Less promising, Spain’s consumer confidence report was released with the biggest monthly drop on record following civil wage cuts and a freeze on pensions. With approximately 38 billion in debt coming due next month, Spain is being watched.
British Pound Traders Find Rate Expectations Tempered by BoE’s Annual Report
Another currency that is fundamentally depressed and should have theoretically appreciated with a boost in underlying risk, the British pound was otherwise preoccupied by the Bank of England’s annual report. For any bulls that were banking on the MPC following the OECD’s advice and moving sooner rather than later on tightening monetary policy, the statement tempered rate speculation by suggesting the economy would struggle to meet the bank’s 2 percent inflation target over the medium term. With commentary like this, official are clearly unconvinced of the permanence of the recent 3.7 percent CPI reading. Adding to this disappointment, net consumer credit slipped 0.1 billion pounds in April.
Japanese Yen Plunges on Prime Minister’s Resignation, Tepid Pace of Capital Spending
As if things could not get any worse in the outlook for Japan and its currency; we have added political trouble to growth and financial concerns. No doubt, Prime Minister Hatoyama’s resignation is a strategic move to prevent the party from losing too many seats in Parliament two months down the line; but when it becomes clear no leader can fix Japan’s problems, the currency will be in real trouble.
Canadian Dollar Primed for Friday’s Employment Data, Outcome May Be a Surprise
The Canadian dollar continues to outperform its higher yielding Australian and New Zealand counterparts. It seems speculators are willing to overlook the diminished forecast for interest rate hikes…or perhaps they are waiting for evidence to force the central banks’ hand. If this is the case, Friday’s employment report is one of those indicators that can redefine growth and interest rate speculation.
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Written by: John Kicklighter, Currency Strategist for DailyFX.com
E-mail: jkicklighter@dailyfx.com
