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• US Dollar’s Bearish Trend Intact but Momentum Easing
• Japanese Yen: What Happens When the Threat of Intervention is Removed?
• Euro Advances Against All Counterparts Except the Swiss Franc Despite SNB Warning
• Commodity Bloc Data Ticks Higher Yet Aussie, Kiwi and Canadian Dollars Struggle
US Dollar’s Bearish Trend Intact but Momentum Easing
Today’s session was a relatively quiet one for the dollar in terms of fundamental impact and volatility. Yet, despite the relative calm, the currency still managed to count its tenth consecutive bearish close (on a trade-weighted basis) and extend itself to a new low for the year. The selling trend behind the world’s reserve is deeply engrained; and it will take either a momentous event or a massive turn in investor sentiment (that is manifest in equities, fixed income and all speculative asset classes) to turn us off course. This is not to mean that we won’t see temporary corrections in the near-term. Indeed, such prolific trends do not exist without pauses along the way. However, to truly turn the dollar’s fortunes around, something elemental has to change.
While the dollar is stuck in a sentiment-dug rut, we shouldn’t ignore the data that feeds into forecasts for growth and the eventual return of a hawkish monetary policy stance. Amongst the listing for the day, the housing data was the most attention grabbing. Construction on new homes grew three percent last month to a 598,000 unit a year pace – the fastest in nine months. Modestly better than expected, the breakdown showed reason for concern as single family homes actually contracted for the first time since January. Housing is a sensitive barometer for economic health due to its ties to credit activity and consumer spending; and new construction is further the leading measure for the sector. The other releases for the day hold less sway. Initial jobless claims for the week ending September 12th unexpectedly contracted – in line with the steady improvement in the pace of monthly payroll cuts. The Philadelphia Fed manufacturing report surged to its highest positive reading since June of 2007; but the regional report doesn’t necessarily set a precedence for the broader economy.
In the end, it was the unscheduled releases that were far more interesting for the dollar considering the influence that risk trends, capital flow and exit strategies have in today’s markets. The Federal Reserve’s Flow of Funds report recorded a $2 trillion increase in US household wealth through the second quarter for the biggest increase on records going back to 1952. This is a boost supported by both the early reversal in housing ($139 billion) and the rebound in capital markets ($1.36 trillion). At the same time, we are still a way from returning to the levels of wealth and availability of credit that we were used to before the financial crisis. Another story that seems to have generally gone under the radar is the Fed’s review of major financial institutions’ exposure to commercial real estate. While this doesn’t seem to be anything as formal as the ‘stress test’ earlier this year; it highlights the most unstable area of financial moving forward. Looking ahead to tomorrow, there are no meaningful indicators scheduled for release; so the path of least resistance is for chop that likely breaks the steady trend. Though, it should be noted that major reversals in underlying sentiment have often developed when the docket was empty and the weekend was in sight.
Japanese Yen: What Happens When the Threat of Intervention is Removed?
Though it is not frequently mentioned, market participants know that there is a constant threat of intervention working against the Japanese yen. It has been the policy of the previous administration (in power for nearly half a century) to protect export interests by strategically intervening on the currency’s behalf to ensure that it does not appreciate so far as to choke off demand. However, with the regime change, there seem to have been a few alterations to the government’s economic approach as well. Today, Japan’s new Finance Minister, Hirohisa Fujii, said at a press conference that he was opposed to intervention if the yen was appreciating steadily and “speculative funds” were not eliciting “abnormal movements.” Taking a far more Laissez-faire approach to the often manipulated exchange rate, the policy authority said it wasn’t appropriate for the government to decide what an appropriate level for the currency was. It will be interesting to see how this extra degree of freedom will impact price action going forward. In other news, the Bank of Japan surprised no one in leaving its benchmark lending rate unchanged at 0.1 percent. Keeping with the measured improvements in the outlook over the past few months, the group said there were signs of improvement but ‘downside risks’ as well. We will see if the upcoming monthly report elaborates on any measured improvement in their language.
Euro Advances Against All Counterparts Except the Swiss Franc Despite SNB Warning
Compared to its US counterpart, the euro was relatively quiet. Similarly lacking for volatility, the world’s second most liquid currency is still positioned in the middle of the risk spectrum with a moderate benchmark yield and a notably optimistic economic outlook from policy officials. Ultimately, the currency enjoyed a slow, bullish bias against most of its pairings thanks in part to a better than expected physical trade balance for the month of July. According to the official statistics, the Euro Zone surplus grew to 12.6 billion euros for the month – the largest positive balance since July 2002 and very nearly the highest on records going back to the 1980’s. However, there was one pair that prominently stood out for its sharp reversal against the euro: EURCHF. The Swiss National Bank met expectations at its quarterly policy meeting by holding the target lending rate at an average of 0.25 percent; but it is still unusual to hear their official stance of fighting the franc’s appreciation through intervention. In a time when authorities the world over are warning against protectionism, this stance may rise the ire of some foreign politicians. Initially, this announcement sent the franc tumbling; but previous swings in the exchange rate were on actual periods of central bank trading.
Commodity Bloc Data Ticks Higher Yet Aussie, Kiwi and Canadian Dollars Struggle
With risk appetite pulling tempered through Thursday’s session, the commodity currencies were naturally put into a holding pattern. As has been the case for months, the Australian, New Zealand and to a lesser extent Canadian dollars will continue to find their pace from broader sentiment; but that does not mean that data is to be written completely off. In the earlier hours of the Asian session, the New Zealand Business PMI Index for August slipped on a pull back in production and new orders measures (though employment improved). The Aussie dollar was somewhat more influenced by an annual report from the RBA that stated the central bank would pay the government a record dividend of A$5.98 billion earned through buying the currency to buffer the depreciation during the financial crisis. The Westpac-ACCI industrial trends survey for the 3Q was similarly interesting closing in on a positive reading (it printed at 48.2). Finally, the Canadian dollar is struggling to keep up with the high-yield pack. The annual CPI figure for August ticked up from its 56 year low; but was contracting at a 0.8 percent clip.
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Written by: John Kicklighter, Currency Strategist for DailyFX.com
E-mail: jkicklighter@dailyfx.com
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