Dollar’s Rapid Advance Cools as the Market Awaits its Next Risk Catalyst, Tomorrow’s Data

Dollar’s Rapid Advance Cools as the Market Awaits its Next Risk Catalyst, Tomorrow’s Data
Euro Stabilizes ahead of Heavy Event Risk Despite Rising Financial Concerns, Deepening Greek Recession
Japanese Yen Reverses Course after Finance Minister Plays Coy in Intervention Preparations
New Zealand Dollar Rallies after Strong Retail Sales Data Supports the Argument for a Rate Hike
Australian Dollar Lags its Commodity Currency Counterparts as Rate Potential Continues to Dissipate
British Pound Tumbles Across the Board Despite a Lack of Actionable Event Risk

What was the specific driver of Wednesday’s market-wide plunge in risk appetite? Some may point to scheduled economic data; but there was little that could claim a meaningful global impact to growth or financial stability readings. The exogenous financial headlines would have a little more influence; but there too, the news was more open to interpretation when it came to its sway over the global trends. In the end, the true driver of the EURUSD’s biggest drop since the peak of the last financial crisis back in October of 2008 was speculation itself. With the proper mix of fundamental deterioration through the preceding days and a consistently dour economic outlook, all that was needed was a speculative catalyst to trigger the shift in positioning. With the reversal on risk made, the burden now falls to the fundamental backdrop to support further encourage the selling of relatively risky assets and diversification to safe havens like the US dollar. Among Thursday’s headlines, we can see that the media (which helps manipulate the prevailing bias) is more sensitive to bearish news. Yet, the news that was offered was far from extraordinary. A rebuff from Chinese property developers against increased regulation, ECB purchases of Irish sovereign debt and rising US foreclosures is far from inflammatory.

An indicator that was released during Thursday’s session; but may have reserved its impact on confidence until later was the Greek GDP numbers. This particular economy represents a very small segment of the European Union as a whole, much less the global economy. However, its influence is leveraged by the knowledge that the troubled nation poses a very real threat to the viability of one of the largest economies in the world. Though the outcome was particularly discouraging, the immediate reaction has been deferred by the knowledge that the Union’s larger and more troubled members will post their own activity updates tomorrow. With the region’s weak link having already reported deteriorating health to match its financial position, the market will be receptive to disappointments from the core constituents; and positive outcomes could be played down as lagging data or stimulus-led improvement. Furthermore, the economic significance of this data will lead investors to be on the lookout for financial hiccups that can be interpreted as an effort to sell risk across the board.

From the US, the listings on the docket will have a meaningful influence over gauging the economy’s relative health (a key fundamental driver for currency traders) and could easily spill over to risk trends. Today’s top economic event risk peaked with the weekly initial jobless claims figures. While the indicator did rise to a six month high that further undermines the employment picture and recovery hopes; it is hardly a surprising outcome or even a market-moving indicator. Tomorrow’s listings are another story. The data cover all three of the primary fundamental drivers for the greenback: interest rate expectations; relative growth expectations and risk appetite. Given the Fed’s recent shift in policy stance and the lackluster level of inflation, the CPI numbers will likely carry little weight. On the other hand, the University of Michigan consumer sentiment survey for August and July retail sales will offer a timely impression of strength for the economy’s primary fundamental engine. And, should the pace of growth further deteriorate, expect equities and other ‘risky’ assets to retreat while the dollar subsequently climbs.

Euro Stabilizes ahead of Heavy Event Risk Despite Rising Financial Concerns, Deepening Greek Recession

Despite the steady pace of the euro Thursday, the currency’s fundamental backdrop actually experienced a significant shift. Looking off the docket first, the market’s acceptance of the region’s sovereign debt receded with an Irish government bill auction drawing significantly higher rates and requiring ECB bids to prevent fear of a failure. The more accessible news for the day, however, was the deeper than expected contraction in the Greek economy. According to the statistics, the underperforming economy shrunk for a seventh consecutive quarter by 1.5 percent. The implications this unfavorable data would have over the region (life-wringing austerity measures are accelerating an economy already mired in recession), however, can be put off because of the forthcoming GDP figures from the largest members (Germany, France) and additional underperformers (Portugal, Spain). The forecasts for the largest economies is optimism while the laggards is bearish. Regardless of the outcome, we already know that the worst positioned member of the group is on the verge of collapse and threatens Europe as a whole.

Japanese Yen Reverses Course after Finance Minister Plays Coy in Intervention Preparations

Just a day after USDJPY tested a 15-year low, the Japanese yen has met a wave of selling across the board. After hitting such a significant low, intervention chatter from officials would be expected. However, when Japan’s Financial Minister was questioned about his position on FX manipulation, the official remained mum. Perhaps they the government is abiding by the same mysterious persona as the BoJ.

New Zealand Dollar Rallies after Strong Retail Sales Data Supports the Argument for a Rate Hike

In recent weeks, New Zealand data that historically shows little precedence for moving the market has actually roused meaningful price action during the low liquidity period between US close and Asian session open. Early Friday morning, traders were met with housing data for July and June retail sales. The housing numbers disappointed; but consumer health filled the gap with a far better than expected sales increase.

Australian Dollar Lags its Commodity Currency Counterparts as Rate Potential Continues to Dissipate

The Australian dollar was riding off the disappointing outcome in the consumer inflation and unemployment data from early Thursday morning in an effort to fill in for curbed risk trends. When underlying fundamental trends shift for a particular currency, it is particularly sensitive to risk trends. This is the case for the Aussie dollar with interest rate expectations ticking down to zero and Chinese growth sputtering.

British Pound Tumbles Across the Board Despite a Lack of Actionable Event Risk

With no scheduled event risk for the UK specifically, the sterling was moving in sympathy to its mainland European counterpart. Slowed growth and financial trouble for the Eurozone means a lack of export demand and credit for the United Kingdom. This is a loss that cannot be afforded by an economy that is struggling to maintain a trend of expansion when austerity measures are already weighing activity down.

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