Dollar Tumble Continues into its Fifth Day as Disappointing Spending Data Takes Over for Risk Trends

Dollar Tumble Continues into its Fifth Day as Disappointing Spending Data Takes Over for Risk Trends
Euro’s Advance Cools as Traders Await Greece Audit and Thursday’s ECB Policy Decision
British Pound Extends its Best Trend in 18 Years against the Dollar as BoE Avoids Dovish Track
Australian Dollar Little Moved After RBA Holds Rates at 4.50 Percent for a Third Meeting
Japanese Yen Nears Pivotal 85 against Dollar as FSA Announces Limit on Speculative Trading
New Zealand Dollar Finds Limited Strength in 2Q Earnings Data, Employment Change Promises Bigger Impact

Though the effort to build up risky positions (and the natural counterpoint, to sell safe havens) diminished through Tuesday’s trading session; the dollar maintained its bearish trajectory. Dropping for a fifth day on a trade weighted basis, the dollar index is in its most consistent slump in four months (but this time the decline comes amid a much larger bear trend); which in turn leads the world’s most liquid currency to a three-month low and below the pivotal 200-day moving average. For technical traders, the dollar’s performance is clear: the tumble is extraordinarily consistent and aggressive. Trying to pick a bottom given this level momentum would be dangerous and working in low probabilities. For the fundamentally-inclined, better arguments can be presented for dollar strength – though there is still considerable risk for those looking to counter on the basis of investor sentiment and relative economic strength.

From a risk perspective, the need for a safe haven continues to diminish. Our unsophisticated measure of risk appetite (benchmark equity indexes) tells us that optimism cooled Tuesday. In fact, the S&P 500 ended the day down 0.5 percent. Nevertheless, the market’s bullish trend is indisputable – lest we forget, the index is just off its highest close in two-and-a-half months. As it stands, the market as a whole is still more receptive to those indicators that contribute to a positive outlook for growth and financial markets while discounting the data and news that would undermine a rosy forecast. That may not be easy to do if the fundamental fodder continues its unfavorable turn. It is important to remember that the collective outlook from officials around the globe – and indeed what we can garner from economic data – presents a clear cooling in economic expansion. Without growth, efforts to expand lending will diminish, the removal of stimulus will be amplified and those regions that are financially strained could once again face default fears. These are the ideal conditions for a depressed US dollar to quickly find its bearings and recover lost ground. Further developing risk trends today, confidence in Europe’s recovery has ebbed ahead of the results from the IMF, EU and ECB’s review on Greece’s progress. This assessment is important for releasing the second tranche of the three-year bailout program. Another stepping stone in the advancement of optimism that happens to be slipping is the stability of China’s credit and capital markets. According to an official with the Ministry of Housing and Urban Development, the country will not relax its adopted property regulations to support growth until prices are brought under control. And, then there is the health of the US economy – a proxy for global performance.

Just this past week, the Commerce Department confirmed a significant cooling in the pace of expansion for the world’s largest economy. Today we saw that this trend could easily extend into the third quarter. The same data group reported no change in personal income and spending through the month of June. This stagnation is largely a product of an entrenched level of high unemployment. Should the natural level of joblessness remain at current levels into the foreseeable future, consumer spending will be severely culled as the means and confidence for consumption will evaporate. And, should this component of growth (accounting for approximately 70 percent of output in the US) diminish, the economy itself will stall. Another view of the economy will be offered in tomorrow’s ISM service report – from the aspect of business activity.

Euro’s Advance Cools as Traders Await Greece Audit and Thursday’s ECB Policy Decision

The euro posted another advance against its benchmark counterpart: the US dollar. This isn’t difficult to accomplish considering the greenback is tumbling across the board. Nonetheless, the liquidity behind this pair is so deep that it can carry the shared currency higher across most of its counterparts. That being said, we look to EURJPY and see that risk aversion has started to bleed into the euro’s performance once again. From a fundamental perspective, the economic docket for the euro was relatively light. Only the Euro Zone PPI reading would even show up on the radar; but inflation is hardly a concern of the average euro trader at this point. Far more interesting is the rumor mongering surrounding the ECB, EU and IMF’s evaluation of Greece’s progress towards reducing its budget. A clean bill of health is needed to release the next tier of the country’s 110 billion euro bailout plan. They will almost certainly pass. For a little more uncertainty, sovereign bond auctions could vary in its results a little more. Hungary successfully sold 3-month debt today. Portugal is set to sell 1 billion Wednesday and Spain 3.5 billion Thursday.

British Pound Extends its Best Trend in 18 Years against the Dollar as BoE Avoids Dovish Track

Set against a backdrop of an exceedingly weak dollar, GBPUSD was able to extend its bullish run to its most consistent performance in 18 years. Among the crosses though, the sterling’s performance was far more restrained. Today, the BoE’s Deputy Governor said the central bank should not loosen its policy nor buy bonds – a positive sign for rate forecasts. And, Prime Minister Cameron said in a statement that spending cuts would not be reversed when growth took hold – a win for deficits. That being said, the markets will dictate their abilities going forward.

Australian Dollar Little Moved After RBA Holds Rates at 4.50 Percent for a Third Meeting

The Reserve Bank of Australia surprised very few early in Tuesday’s Asian session when the authority announced it would hold the benchmark lending rate unchanged for a third meeting. The 12 month forecast priced in by overnight index swaps shows debate over the viability of a single, quarter-point rate hike with that time frame. With rates on hold, the Aussie dollar will be increasingly dependent on positive sentiment.

Japanese Yen Nears Pivotal 85 against Dollar as FSA Announces Limit on Speculative Trading

USDJPY is fast approaching the 85 level. Why is this level important? It represents a historical low for the pair and the level at which many think policy officials will finally step in and intervene on the yen’s behalf. This should be a strong deterrent for those looking to further sell. That being said, a move to limit retail leverage on FX trading could further unwind carry interest and at the very least depress volatility for the currency.

New Zealand Dollar Finds Limited Strength in 2Q Earnings Data, Employment Change Promises Bigger Impact

According to economic data released Tuesday morning, earnings through the second quarter grew 0.5 percent to lay a foundation for economic expansion through consumer channels. That being said, the kiwi showed little reaction to the news. For impact, the Employment data is far more market-moving. Will a significant shift in this data spark volatility in a traditionally low activity period for the FX markets?

For Real Time Forex News, visit: http://www.dailyfx.com/real_time_news/

**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

Daily_Fundamentals_08042010_body_Picture_3.png, Dollar Tumble Continues into its Fifth Day as Disappointing Spending Data Takes Over for Risk Trends