• Dollar Slips to a Fresh Two-Month Low as Speculators Ignore Friday’s Questionable Fundamentals
• Euro Seemingly Unfazed by Stress Test Results, Though One Slip Could Trigger Fear
• British Pound Weathers a Cooling in Housing Prices, Turns to Retail Sales Activity
• Australian Dollar Offered a Mixed Forecast of Upcoming CPI Data
• Japanese Yen Holds Steady Despite Positive Risk Trends Behind Equities
• New Zealand Dollar Forges New Highs as Interest Rate Expectations Pick up the Slack in Risk Trends
Dollar Slips to a Fresh Two-Month Low as Speculators Ignore Friday’s Questionable Fundamentals
There were a few telltale signs of rising confidence and risk appetite. However, if we were to make a market-wide assessment of investor sentiment; we would be left with a very different interpretation following the long-anticipated release of the EU stress test results this past Friday. If we were to make are assessment of underlying confidence on one or two benchmark asset classes; we may have been led to believe that today’s session was a strong sign of optimism on the collective sigh of relief following last week’s risk deluge. Cherry picking, we see that the S&P 500 led equities to a meaning 1.1 percent advance and short-term break above resistance; while the safe-haven dollar slipped for a third session to a fresh two-month low on a trade-weighted basis. That being said, we can refer to the mixed performance of bonds or weakness in commodities to establish that there was little coordination in loading up on risky investments while shunning the danger they entail. As for the greenback, the recently strong correlation it has established to equities is likely a combination of selling pressure through unique fundamental considerations and a redistribution of capital.
One of the primary roles for the US dollar this year has been its function as a counterpart to its most liquid counterparts. Troubles with Europe’s banking system, threats of sovereign downgrades and then austerity clipped growth for the UK, and a permanence of deflation for Japan had sent an excessive wave of capital to the US. Yet in recent months, we have seen the relative strength of economic activity, yield development and fiscal health fade so that the opportunities of the global powerhouses were more closely balanced. Naturally, this would halt the flow of capital into the US and require a balancing of sorts. An equalized position between these major currencies wouldn’t necessary put the dollar in retreat. What we have seen over the past few weeks has been a marked improvement in the other economies’ markets to draw capital out. This past Friday’s EU Stress Test was the most recent shift; and it was a significant one. Considering the number and size of the gaps in the official review of the region’s largest banks, it is by default a vote of confidence if doubt does not undermine the euro. That being said, it is too early to assess investors’ assessment of global risk. A failed bond auction in Europe could revive fear over the reverberations of a crisis from this region or another separate threat like the collapse of China’s asset bubble can dramatically alter the course of the global capital flow.
As we wait for a clear and meaningful direction on underlying investor sentiment trends, the dollar can add to or detract from its own health through fundamental event risk. Most financial headlines were dedicated to the dramatic rebound in new home sales through June. Aided by a downward revision in the previous month’s reading, sales jumped a remarkable 23.6 percent. However, while this was the biggest increase since 1980, it is important to account for the fact that May’s decline was the biggest on record and the annual 330,000 unit pace of sales in the more recent month is the second lowest since the series began in 1963. The housing market is far from recovery. What didn’t receive enough attention was the Chicago Fed’s National Activity Index for the same month. Used as a growth forecast for the coming three to six months, this indicator slipped (-0.63) indicating a cooling in activity. Ahead of the Friday release of 2Q GDP, this is a discouraging report.
Related: Discuss the Dollar in the DailyFX Forum, US Dollar Awaits a Clear Bearing on Risk, Looks Ahead to 2Q GDP
Euro Seemingly Unfazed by Stress Test Results, Though One Slip Could Trigger Fear
European financial markets had their first opportunity to respond to the EU Stress Test results from Friday. And, despite a significant amount of space dedicated on the web and in print from various financial sources about the questionable conclusions that were released, the primary capital markets held surprisingly stable. Among the better points made over the weekend was the analysis from Citigroup that should banks had been made to mark their bond holdings to market rather than be allowed to put them in an account whereby they are expected to hold the debt to maturity (an unlikely outcome for the bulk of this debt), 24 banks would have failed the test. This does not even take into account the fact that sovereign default was deemed impossible and counterparty risk seem nonexistent. In the end, this is just a measure of credibility for officials. All we need is a something like a failed debt auction for Spain tomorrow to revive uncertainty and selling in the euro.
British Pound Weathers a Cooling in Housing Prices, Turns to Retail Sales Activity
The British pound rallied against the universally weak US dollar Friday; but it would not perform nearly as well against most of its other liquid counterparts. For its own part, the sterling is still attempting to ride off the bullish implications of Friday’s 2Q GDP release; and this data indicator only really holds weight against the greenback. Fresh data today offers reason for doubt in the future pace of economic activity. The lagging Hometrack house prices is starting to weigh recovery hopes in a notable flagging sector. Tomorrow, the CBI retail activity report will stir volatility.
Australian Dollar Offered a Mixed Forecast of Upcoming CPI Data
Given the influence this past week’s RBA minutes had on Aussie dollar price action, there is a heavy interest in interest expectations. The CPI data for tomorrow is perhaps the most pertinent data for speculating on interest rate potential going forward; but today’s factory level inflation reading offered an upstream measure of health. The PPI reading for 2Q produced a weak 0.3 percent clip over the three month period.
Japanese Yen Holds Steady Despite Positive Risk Trends Behind Equities
There was a notable divergence between the performance of the Japanese yen and the US dollar Monday. This is an important distinction to make for those looking to measure risk appetite. In fact, USDJPY reversed sharply intraday suggesting that sentiment was not particularly strong; but nor was it weak. What we can discern from this mix is that underlying risk appetite was little moved while the dollar was weak.
New Zealand Dollar Forges New Highs as Interest Rate Expectations Pick up the Slack in Risk Trends
We are quickly closing in on the RBNZ’s rate decision. Though scheduled with an official release time of 17:00 EST on Wednesday, the market is already pricing in a positive outcome. EURNZD, GBPNZD and NZDJPY all performed well; but it was NZDUSD’s six month high that really caught traders’ attention. There is a 96 percent chance of a 25 bps hike priced in; which means disappointment could be severe.
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Written by: John Kicklighter, Currency Strategist for DailyFX.com
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