Dollar Retraces Early Morning Gains but Fed’s Softened Policy Stance Not Likely to Curb Reversal

Dollar Retraces Early Morning Gains but Fed’s Softened Policy Stance Not Likely to Curb Reversal
British Pound Balances Tuesday’s Event Risk to Focus on Upcoming Jobs Numbers and BoE Report
Japanese Yen Rallies against Dollar as BoJ Maintains Its Policy Stance While Fed Loosens
Euro Exposed to Dollar Volatility as End-of-Week GDP Numbers Approach
Australian Dollar Australian Dollar Struggles with Sentiment, Confidence Indicators
Canadian Dollar Takes a Modest Hit from Housing Data, Trade Figures Tomorrow Carry More Weight

The US dollar has put in for a meaningful reversal – or has it? Calling a top or bottom for any market is explicitly risky. And, for an asset that has liquidity that runs as deep as the dollar, the effort is far more demanding because a shift in underlying positioning requires a colossal swing in confidence and capital. That being said, there are many telltale signs from a technical perspective that point to a changing of the guard for the world’s reserve currency. Arguably interchangeable with EURUSD, the Dollar Index brought an end to a consistent trend of ever descending swing lows that can be traced back to the opening trading session in July or the 15-month high the composite set back in June. A similar picture could be discerned from the activity for GBPUSD (which had last week stalled short of 1.60) and AUDUSD. That being said, the timing of the initial ‘break’ and the position of the greenback at the official close of Tuesday’s sessions raises doubt over the conviction in the promising move. A near full retracement of both the EURUSD and GBPUSD’s move significantly undermines the argument for building momentum on a bearish move. To clarify the picture; we can garner a more complete picture of direction and momentum from today’s fundamental contributions.

Focusing in on the timing of the dollar’s reversal; we can see from higher frequency charts that the currency was advancing well before scheduled US event risk crossed the wires. The speculative argument that an overdue retracement was playing out or congestion had encouraged anti-dollar profit taking aside; this move can be partially attributed to the growing threat of financial instability in China (the world’s poster child for high return). Lost in the headlines of the day, the China’s bank regulator reportedly followed up on its calls for lenders to stress test for a 60 percent drop in residential housing prices with a call for its financial institutions to transfer off-balance-sheet loans back to the companies’ books. Fitch recently estimated this could measure as much as $2.3 trillion yuan (approximately $340 billion). The impact this could have on the systems health and capital it could extract is yet another threat to China’s delicate financial position.

The dollar’s move and fundamentals seemed clear, that is until the Federal Reserve released its policy decision and impressions. Conservatives went into the event expecting little from the group that has made a concerted effort this year to halt asset purchases, raise the discount rate and allow emergency stimulus programs for corporations and money market funds expire. And, this is where uncertainty would enter into the picture. Speculation that this meeting would offer the opportunity for the central bank to increase stimulus began with comments to that effect delivered by a Fed member not long ago. That is exactly what would transpire. In addition to the now boiler plate suggestion that rates would be kept low for “an extended period,” the group noted that the “pace of economic recovery is likely to be more modest” than expected. Alone, this development could have actually bolstered the dollar’s appeal as a safe haven. However, the news that the fed would indeed expand its stimulus effort by reinvesting principle payments on agency and MBS debt holdings into long-term government offered a glimmer of hope that a situation similar to 2009 was developing whereby the market would be propped up by stimulus. The initial bounce in risk was obvious; but the trend has not necessarily been sabotaged. Investors are far more skeptical of market growth founded on temporary stimulus.

British Pound Balances Tuesday’s Event Risk to Focus on Upcoming Jobs Numbers and BoE Report

The British pound was feeling some of the side effects of volatility behind risk trends that accompanied the US event risk and dollar price action. However, the sterling would find its own fundamental catalysts to work with. What’s more, the threat of big-ticket, market-moving data tomorrow has helped to guide the single currency on its own speculative bearings. From the docket today, news that a two-year high in exports had reduced the trade deficit more than expected was offset by a 15-month low in the Nationwide Consumer Confidence survey (it is notable that the spending plans component dropped to its lowest level since January 2009). Tomorrow, the UK economic docket will carry top scheduled event risk. First up is the jobless claims data for July. Employment trends are critical to an economy that has shown a strong 2Q but faces severe doubts over the 3Q performance. The BoE quarterly inflation report holds the greater potential however. With growth indicators, election results and deficit cutting efforts behind them; the MPC will now offer its assessment of economic activity and the need for stimulus going forward.

Japanese Yen Rallies against Dollar as BoJ Maintains Its Policy Stance While Fed Loosens

Like with the Fed, the market was showing a considerable probability that the Bank of Japan would find a way to loosen monetary policy at its meeting in an effort to help facilitate growth and jump start inflation. Yet, unlike the American policy group, the BoJ would not deviate from its course. In fact, the Governor would go so far as to suggest that the economy was showing resiliency to the yen’s overbearing appreciation.

Euro Exposed to Dollar Volatility as End-of-Week GDP Numbers Approach

In an unusual twist, the euro saw very little specific event risk (scheduled and unscheduled) to work with Tuesday. And, yet, that would prevent speculative trends from plying the shared currency. The most prominent driver for the euro today was the strength of its primary counterpart: the US dollar. This is likely to remain the case until Friday when European 2Q GDP numbers are released and we see the impact of austerity cuts.

Australian Dollar Australian Dollar Struggles with Sentiment, Confidence Indicators

With traditional risk-sensitive assets experiencing substantial volatility Tuesday, the Australian dollar would have little choice but to follow suit. That being said, the economic docket would work to leverage this prevailing direction that exogenous catalysts provided. A business sentiment indicator would hit a 14-month low thanks to previous RBA rate hikes and consumer spending would show signs of cooling as growth tempers.

Canadian Dollar Takes a Modest Hit from Housing Data, Trade Figures Tomorrow Carry More Weight

Though it was swallowed by more headline-friendly economic data, the Canadian indicators were worth noting. A seven-month low in housing starts adds to concern that the Canadian economy is being drawn down to the United States’ or Europe’s level. Tomorrow’s physical trade balance number will have a little more influence as this is a more critical component of activity for the world’s eighth largest economy.

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Daily_Fundamentals_08112010_body_Picture_3.png, Dollar Retraces Early Morning Gains but Fed’s Softened Policy Stance Not Likely to Curb Reversal