• Dollar Retracement Modest Despite Dow’s Rally, A Sign that Sentiment Still Anchored

• Dollar Retracement Modest Despite Dow’s Rally, A Sign that Sentiment Still Anchored
• Euro Struggles to Advance on Risk Appetite Boost as Spanish Citizens Strike
• British Pound Tumbles after Fitch Warns More Spending Cuts Needed to Retail UK’s Top Rating
• New Zealand Dollar Traders Await the RBNZ’s First Rate Hike Since July 2007
• Swiss Franc Reaction to SNB Intervention Diminishing as Ineffectiveness Morphs to Desperation

Dollar Retracement Modest Despite Dow’s Rally, A Sign that Sentiment Still Anchored
While there were a few notable economic releases and noteworthy headlines, fundamentals were relatively light on Tuesday. And, from this low tide in event risk, there was a clear market-wide move to bolster risk appetite. Looking to the more risk-prone asset classes, the Dow Jones Industrial Average would close the day 1.26 percent higher, oil futures climbed a modest 0.77 percent and the commodity currencies rallied across the board. Though, from this group, there was a clear lack of conviction behind this premature recovery. Equities didn’t really find a footing until the end of the US trading session and growth-linked commodities were more choppy than bullish. From the FX market, the high-yield currencies would put in for remarkable gains; but more fundamentally-sensitive currencies like the euro and dollar would foster far more controlled shifts. Stepping back and looking at today’s performance in context, it is not a stretch to suggest the speculative markets were moderating rather than putting in for a definitive change in trend.

It is relatively easy to set a landmark for sentiment at this point. Until the Dow once again surpasses the closely watch 10,000 mark and EURUSD can reclaim its historical 1.2130 midpoint, momentum remains with the effort to deleverage and divest from risky positioning. With this in mind, we can assess the dollar’s performance. On a trade-weighted basis, the greenback slipped for the first time in four days but with little fervor. In fact, the moderate decline has not meaningfully unsettled the larger trend that has developed over the past seven months. This same observation (adjusted for relation to risk) can be extended to most currencies and other assets. That suggests that Tuesday’s performance was predominately a correction in a larger trend – a common occurrence regardless of direction. Alternatively, it is interesting that both the Dow and EURUSD are struggling to generate follow through on what was a momentous breakout for both this past Friday. This would suggest further progress on risk aversion is requiring greater and greater fundamental support. Typically, this is one of the signs that sentiment is soon to reverse course; but given the fundamental outlook along with excess risk premium and leverage still in the market, the trend is still fortified.

Looking for other sources of weakness for the dollar outside sentiment trends, we would actually find event risk to support the single currency. Late in the day Monday, Fed Chairman Bernanke offered a positive assessment on the US economic, remarking that the recovery was intact and “moderate paced.” Far more hawkish in his commentary today, Kansas City Fed President Thomas Hoenig offered up the same level of hawkishness that he laid out next week in calling for the central bank to raise the benchmark rate to 1 percent by the end of the summer. Last week this voting board member and ardent hawk said the Fed Funds rate should quickly find its way back up to 3 percent. Elsewhere, from the docket, the NFIB small business sentiment index for May rose to a 20 month high 92.2 with a positive turn in net hiring forecasts (this group accounts for the majority of US jobs) and notable improvements in capital investment, economic performance and earnings figures. And, for a look at global investors appetite for the dollar and US-based assets, today’s $36 billion auction in three-year Treasury bills yielded its third highest level of demand on record with demand for 3.23 times the amount of debt offered.

Euro Struggles to Advance on Risk Appetite Boost as Spanish Citizens Strike
In assessing the fundamental strength or weakness of the euro in recent months, it is important to first start from the condition of financial uncertainty for the European Union. A Bloomberg poll of investors reported approximately 75 percent of respondents expected Greece to eventually default while 40 percent expected the nation would desert the shared currency. This is a long-term concern with very real fundamental support; but the markets have priced in a lot and the pace now seems to be one where sentiment lives day-to-day on updates. News today saw Hungarian officials further backtracking on their default alarm by saying they would do everything within their power to cut their deficit. Setting up the region’s financial backstop, the European Financial Stability Facility was agreed upon so that bonds would be issued through this fund only should a member file a need (an event that would no doubt spark panic). Only Spain’s general strike, where an estimated 11 percent of the public sector work force attended, would raise concern. Yet pains like this are simply considered the cost of recovery. For data, Germany would impress with a 0.9 percent increase in factory activity that bolstered the annual pace of production to a record high 13.3 percent.

British Pound Tumbles after Fitch Warns More Spending Cuts Needed to Retail UK’s Top Rating
The pound was the worst performing major on the day as the general downdraft in investor sentiment (this is a fundamentally weak currency and thereby susceptible to risk trends) was amplified by a fundamental warning that would hit right at the heart of sterling traders’ concern for the currency. Fitch warned that the new government would have to do more to bring their financial situation in order or risk losing the nation’s top sovereign credit rating. This is dire indeed; but is it that surprising? In the notice, the rating agency said it was referring to the April budget. Prime Minister Cameron and Chancellor of the Exchequer Osborne have, since taking the reins, have vowed significant cuts that would be announced on the 22nd. Momentum on this warning alone will likely dry up quickly. As for data, the BRC retail sales activity report grew 3.0 percent in May from a year ago while its inflation gauge for the same period slowed from a 2.0 percent annual clip to 1.8 percent.

New Zealand Dollar Traders Await the RBNZ’s First Rate Hike Since July 2007
Perhaps it was a telling rally for the New Zealand dollar today. While Tuesday’s advance was no doubt the responsibility of investor appetite, speculation surrounding tomorrow’s Reserve Bank of New Zealand rate decision no doubt helped its cause. With the event scheduled for 21:00 GMT, Governor Bollard is expected to deliver his first hike in nearly three years. The markets are pricing in a 72 percent chance of a 25 bp hike and they see 161 bps through 12 months. However, given this is already priced in, a lack of guidance for future hikes could spell trouble.

Swiss Franc Reaction to SNB Intervention Diminishing as Ineffectiveness Morphs to Desperation
Though the Swiss National Bank would not confirm it (as is their policy), the market was abuzz with rumor that the central bank had once again attempted an intervention. And yet, the 80 point rally that resulted would only last for approximately 15 minutes. There is little doubt at this point that the policy authority cannot fight the markets. They will simply have to allow fundamentals to take their course.

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