• Dollar Tumbles Stalls as Speculative Advance Sidelined by Building Fundamental Resistance
• Euro Traders Take Note of Spain Now as Speculation of a Request for Financial Support Builds
• British Pound Surprisingly Stable Through a Drop in Confidence and Unemployment
• Swiss Franc: What to Expect from Thursday’s SNB Rate Decision
• Australian Dollar: Growth and Interest Rate Potential Continue to Slide in the Face of Weak Data
Dollar Tumbles Stalls as Speculative Advance Sidelined by Building Fundamental Resistance
Though we have cleared many of the big psychological levels and closely watched technical boundaries that have held the markets back from a meaningful advance in risk appetite, optimism cooled Wednesday and kept most of the major asset classes bound to tight ranges. The surprising level of inactivity on the day can be partially attributed to the general trading conditions associated with the time of year (many traders refer to the June to September period as the “summer doldrums”). What’s more, the day’s reserved pace was more in line with the low level of volume that the capital markets have otherwise generated over recent weeks. However, between today’s activity levels and yesterday’s the real shift was in investors’ awareness of fundamental curbs to risk appetite. The recurring focus of the past few months – the contagiousness of the European Union’s financial troubles – wouldn’t let up through today’s session. In fact, the pressure would intensify as one of the larger EU members came under the magnifying glass. Speculation that Spain will soon ask for a financial rescue comparable to the Greek lifeline has caught traction with articles suggesting: the government is looking for assistance outside of the European Financial Stability Facility; Spanish banks tapped the ECB for record loans last month; and the nation’s central bank governor plans to release the results of the stress test performed on the country’s banks. Should fear once again overwhelm the nascent rebound in risk appetite, the dollar could once again take its place as the favored safe haven currency. On the other hand, from its peak two weeks ago, dollar (on a trade-weighted basis) has only retraced 19 percent of its gains from November. Could this temper the greenback’s response to a revived risk aversion effort? Only time will tell.
In the meantime, the dollar’s own fundamental health seems to have diminished during the correction in sentiment. A report from ratings agency Standard & Poor’s warned that the carry over effects of the EU’s troubles could have a very real impact on US markets. As credit markets freeze up and borrowing costs rise, the group believes many firms that have a junk rating and are dependent on an increasingly frugal consumer will fold. According to their estimates, non-financial companies owe approximately $1.7 trillion through 2014; and where growth falls short in closing this gap, refinancing will be vital. For an economic impact, the general slump in global financial health is further expected to curb the Federal Reserve’s growth forecasts. While the central bank and Governor Ben Bernanke have maintained the fallout in Europe will have little effect on the US, we have already seen the effects that it has had through lending costs, investments and export expectations. It would be little surprise to see the Fed’s statement after next week’s rate decision to carry more conservative growth forecasts. Another vital deterioration in strength for the dollar is the slump in interest rate expectations. According to Credit Suisse overnight index swaps, interest rate expectations, the 12 month outlook for interest rates is a mere 36 basis points – the lowest since May of last year.
They discouraging outlook for interest rate watchers is primarily a response to the tame economic outlook and ongoing financial uncertainties through the medium-term; but the real discouragement comes from non-existent inflation pressures. Today, the core producer price index advanced to its highest level since September of 2008. Yet, at 1.3 percent, this is hardly a threat. The consumer-level gauge is far more pressing when it comes to policy making; but tomorrow’s CPI reading for the year through May is expected to cool to the Fed’s target 2.0 percent. Add to that the biggest drop in housing starts in 14 months after tax incentives closed and there is little reason to champion a hike.
Related: Discuss the US Dollar in the DailyFX Forum, Dollar Retracement Fundamentally Limited, Speculatively Reasonable
Euro Traders Take Note of Spain Now as Speculation of a Request for Financial Support Builds
The euro’s effort to recover from its progressive and deep depreciation of the past half year helped it to hold off a more significant decline on today’s discouraging fundamental events. The top concern for the shared currency is the growing threat that Spain will have to ask for financial assistance from the European Union, the IMF and perhaps even the US Treasury. At least, that is what an article from El Economista have speculated. This rumor has circulated the market for a couple days now; but it seems investors are paying more attention to the details. From this particular article, they are suggesting that the three aforementioned outfits are already drafting a 250 billion euro credit line that is already double what was given to Greece. It would be particularly concerning that they would not attempt to access the European Financial Stability Facility; and such a move would only given better scope for what a worst case scenario would be whereby other EU members ask for a similar level of assistance. The total overlay would be tremendous. Furthermore, worries over Spain are further exacerbated by the news that Spanish banks had borrowed a record 85.6 billion euros from the ECB last month and that Bank of Spain’s governor plans to release the results of the country’s bank stress tests. This looks like a building wave. We will what impact it has when Spain auctions off 3.5 billion euros in debt tomorrow.
British Pound Surprisingly Stable Through a Drop in Confidence and Unemployment
While there is little doubt that the British pound is anchored by sterling traders preoccupation with the impending emergency budget spending cuts due next week, it is still remarkable that the currency able to essentially weather top tier economic releases with little to no impact on volatility. Released well before the market open, the Nationwide Consumer Confidence report reported its biggest drop since July 2008 as Brits awaited the fallout from the austerity measures. Pushing sentiment to the other side of the market, May jobless claims dropped for a fourth consecutive month and the unemployment rate ticked down to 7.9 percent. What can move the pound from its mooring?
Swiss Franc: What to Expect from Thursday’s SNB Rate Decision
The market and economists are more or less unanimous in their expectations for the SNB to hold its benchmark lending rate unchanged tomorrow; but when it comes to the statement, all bets are off. The central bank has had very real difficulty in holding its currency back from appreciating and the EU’s troubles will no doubt given them reason for concern. Will they simply lower their forecasts?
Australian Dollar: Growth and Interest Rate Potential Continue to Slide in the Face of Weak Data
The RBA’s decision to cool its monetary policy pace seems prophetic. Recently economic data has cooled for the outperforming economy; and data Wednesday further confirmed this. The April Westpac consumer sentiment report stalled for the first time in a year and construction through the first quarter cooled from 15.1 percent to a 4.3 percent pace. Little wonder interest rate expectations are near zero.
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Written by: John Kicklighter, Currency Strategist for DailyFX.com
E-mail: jkicklighter@dailyfx.com