Dollar Marks its Biggest Rally this Year as Sentiment Crumbles on Fed’s, China’s Fundamental Stumbles

Dollar Marks its Biggest Rally this Year as Sentiment Crumbles on Fed’s, China’s Fundamental Stumbles
British Pound: The Biggest Jump in Employment in Decades Wouldn’t Keep GBPUSD from Toppling
Euro Has Enough Trouble with the Dollar Rally but Financial Conditions Add to its Burden
Australian Dollar Crippled by Risk Aversion and Further Undermined by Employment Data
Canadian Dollar Suffers as Trade Data Leverage the Fundamental Argument against Rate Activity
Japanese Yen Further Bolsters its Fundamental Appeal with a Stable BoJ Forecast

The financial headlines were splashed with the horrendous performance of global equities and commodities Wednesday; but the real story for the day was the activity in the currency market. Looking at the benchmark for stock activity (one of the most accepted proxies for investor sentiment), the Dow Jones Industrial Average dropped a remarkable 2.49 percent. As sharp as this decline was, this development would not be fully appreciated because those that stop at a simple analysis would say this effort was not as bearish as the 2.52 percent decline back on July 16th or the 2.65 percent drop on June 29th. However, this particular slide has far greater influence from the perspective of where it would occur (at the end of a consistent bull trend). For the dollar, no cheap concessions can be made to undermine the importance of the day’s performance. The market’s most liquid currency pair, EURUSD, would close the session with an official 2.38 percent loss. For historical perspective, this was the biggest drop from the pair since October 29, 2008. If we recall, the global financial markets were in turmoil back then; and policy officials were desperately trying to restore investor confidence. It is a stretch to suggest that market conditions are as dire today as they were during the worst financial crisis in modern history; but the fundamentals may show us that underlying conditions aren’t too different.

It is easy to label what would transpire for the capital markets back in October of 2008 as a crash because of the wealth that was lost and the magnitude of media coverage that the event would garner. However, it was the fundamental environment that really led to the evaporation of premium back then – fear within the speculative ranks would only leverage what was already there. To reasonably assess whether this burgeoning risk aversion trend will develop into something more permanent, it is important to gauge the balance of fundamental imbalance and speculative influence. In reality, the assessment of economic and financial health of today is much the same as it was two years ago. While liquidity is not forcing banks to fail; the global economy is slowing, leverage (the genesis of uncollateralized debt) is still overused, and now there is not much room for governments to maneuver with stimulus. Conditions are ripe for fear to deflate the market once again. With that in mind, we can put the Fed’s decision yesterday to cap stimulus (no doubt due to concern over financial conditions) into perspective. Setting a floor of $2 trillion in asset holdings for central bank, it is clear that there are few options to bolster support. Should there be an asset bubble collapse in China, another European credit crisis or a major economy stall; selling pressure will quickly gain momentum.

In gauging the economic backdrop of the US dollar, it is important establish the health of the US and global economies. Increasingly important in this equation is China’s momentum. Early through Wednesday’s session, the Asian giant took another hit in a broad round of economic releases. New lending, retail sales, industrial production and fixed asset investment all slowed. If China can’t keep its momentum, what chance do the already sensitive industrial nations have? From the US docket the data was certainly discouraging. The trade account proved it would pick up little slack for domestic consumption with the deficit expanding to its biggest shortfall since October of 2008. Adding a financial concern to this bearish theme, the fiscal deficit in July measured $165 billion – extending the shortfall to a 22nd month (a record for the economy).

British Pound: The Biggest Jump in Employment in Decades Wouldn’t Keep GBPUSD from Toppling

There were two very different signals to draw from the UK’s fundamental docket. On the one hand, we were met with stellar employment numbers. While the change in jobless claims through July was a modest 3,800-contraction, the ILO measure of employment reported 184,000 Brits found jobs through the month. This was the biggest increase in 21 years. For growth, an improvement in labor trends sets a foundation for domestically-led economic growth that further suggests the UK will be able to weather much-needed austerity efforts. Yet, as positive as the data may seem; a warning from the Bank of England that economic activity will cool overwhelms speculation. That is exactly what we would see in the BoE’s Quarterly Inflation Report. The growth outlook was downgraded to a 3.0 percent peak rate (where it was 3.5 percent in the May assessment). And, curbing interest rate expectations for good measure, the two year inflation outlook was lowered to a 1.5 percent clip.

Euro Has Enough Trouble with the Dollar Rally but Financial Conditions Add to its Burden

With the dollar putting in for its biggest rally in nearly two years, it wasn’t difficult to discern which direction the euro would be moving as the greenback’s primary counterpart. And, while most were probably preoccupied with the price action this link would bestow on the market, there were fundamental develops to follow for the euro. Attentive traders should have noticed that Spain’s prime minister was testing the waters on reversing austerity cuts in public sector investment. Another interesting event: Slovakia voted to refuse support to Greece. Conditions are shaky.

Australian Dollar Crippled by Risk Aversion and Further Undermined by Employment Data

Risk appetite trends were enough to get the Australian dollar moving in an unfavorable direction; but fundamentals weren’t doing the currency any favors either. In the early hours of Wednesday’s session, consumer confidence eased with a more temporary climb for the August reading. Far more discouraging, Australia lost 4,200 full-time jobs and the jobless rate rose to a 5.3 percent clip.

Canadian Dollar Suffers as Trade Data Leverage the Fundamental Argument against Rate Activity

The Canadian dollar hasn’t found the bottom in its meteoric fall to fundamental earth. Around a year ago, the loonie was backed by an exceedingly strong economy and unusually high rate expectations. Today, conditions are much different. Further weighing the hold out on the growth front, the economy’s trade deficit ballooned to a 10-month high as foreign demand dries up on the global slowdown.

Japanese Yen Further Bolsters its Fundamental Appeal with a Stable BoJ Forecast

Risk appetite continues to deteriorate; and though the US has better safe haven characteristics, USDJPY put in for a fresh 15-year low test Wednesday. Edging new lows is made possible by a questionably optimistic growth forecast and policy bearing from policy officials. Today, the BoJ maintained its growth assessment for a third month. That being said, does this mean Japan is a good investment center? No.

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dailyfundamentals_081110_body_Picture_3.png, Dollar Marks its Biggest Rally this Year as Sentiment Crumbles on Fed’s, China’s Fundamental Stumbles