o Euro Responds to Greek Accord with Steep Rally yet Fundamentals Still Concerning
o British Pound’s Temporary Stability at Risk from Event Risk, Approaching Election
o Japanese Yen Could Move on Growth, Financial Progress in the Absence of Clear Risk Aversion
o Commodity Bloc Currencies Diverge from US Dollar, Risk Trends
Dollar Pullback Suggests New Trend Dependent on Risk Aversion, Will NFPs Assist?
An impressive breakout is only one of the essential ingredients of a trend. The other is meaningful and consistent follow through. At this point, the dollar has achieved the first condition; but the second remains elusive. What critical fundamental disconnect is keeping the currency from reviving the general trend that has developed since the beginning of December? The simple answer to this question is risk appetite. Though the benchmark equities indexes (including the Dow Jones Industrial Average) have maintained their trajectory and the greenback has itself started to deviate somewhat from its role as a pure safe haven, investor sentiment is essentially immobile and the dollar’s function as a source of liquidity is still strong enough to act as an anchor against progress. With this in mind, the sharp pullback from the benchmark currency just days after breaking free from a month-long period of congestion is makes fundamental sense. Stalled risk trends further clarifies the back-to-back, intraday reversals from that Dow that has cooled its otherwise unshakable advance since the beginning of February. Should sentiment continue to drift, both equity benchmark and currency will find its progress impeded. However, should the scales of risk tilt, one asset will find itself vindicated for its recent trend while the other is forced to correct. For the dollar, the ’safe haven’ factor is still prominent enough that a clear move of risk aversion would encourage flight-to-liquidity inflows as well as the unwinding of capital carry trades that were funding with the currency (there was a considerable amount of carry build up through 2009 when US market rates plunged to record lows). Now we await the catalyst. Having already weathered a number of indicators, announcements and potential crises; it is clear that sentiment itself has momentum to overcome.
While sentiment trends work themselves out, the dollar will continue to redefine its own status in the risk spectrum. Through Friday, there was relatively little in the way of new event risk; but the data that was available would carry enough weight that it alters the outlook for growth. The ‘final’ revision of fourth quarter GDP (these figures can be adjusted for more than a year) unexpectedly slipped a little. Annualized growth ran at a 5.6 percent clip instead of the 5.9 percent rate previously recorded. Looking at some of the more critical statistics from this data, corporate profits reported the fastest year-over-year gain in 25 years (31 percent), business investment rose the most in 12 year (19 percent), consumer spending marked its steepest contraction since 1974 (0.6 percent), and inventories contributed 3.8 percentage points of growth to the overall measure. Clearly, there is an imbalance here. Inventory building is a temporary contributor, business activity cannot sustain itself without actual demand and personal consumption accounts for approximately three quarter of the economy. Unless these elements even out, the US will struggle to move beyond a ‘nascent’ recovery and the possibility of a ‘W’-shaped recovery will remain high. Keeping the focus on domestic demand, we will have a complete assessment of the consumer sector next week with readings that cover employment, income, spending and confidence. For market-moving potential, NFPs takes top spot, especially with a tentative consensus for a 190,000-person increase.
Related: Discuss the US Dollar in the DailyFX Forum, Dollar Forces an Essential Breakout but Where is the Drive?
Euro Responds to Greek Accord with Steep Rally yet Fundamentals Still Concerning
Given the congratulatory commentary coming from policy officials and the firming of regional capital markets, it would seem that all of the euro’s troubles have been solved this week. Indeed, the European Union’s summit has concluded with a promising contingency plan that significantly reduces the immediate threat of a Greek default. However, there are still many holes in the safety net that has been drawn. In the accord itself – which states that the EU would provide bilateral loans to Greece in conjunction with IMF loans should there be no other option – is lacking in critical detail. First of all, there is no explicit set of circumstances by which the aid will be released. Furthermore, all members have to agree that assistance is needed; and we have already seen the willingness by some to provide support. More importantly, no interest rate has been stated on these theoretical loans. They will be high enough to prevent dependency; but Greece is already in the position that it can hardly afford its austerity cuts. From this solution, it is clear that policy officials are simply hoping that market conditions will stabilize and the members will have time to stabilize. Yet, the road to recovery is a long one; and there are many economies in the group that are struggling between recession and deficit. And, despite what the ECB’s Bini Smaghi says, there is an implicit sense of moral hazard in this fix.
British Pound’s Temporary Stability at Risk from Event Risk, Approaching Election
The market’s interpretation of success for the United Kingdom in this past week’s development isn’t nearly as complete as what the European Union was able to accomplish. This past week, Chancellor of the Exchequer Alistair Darling delivered an improved 2011 budget forecast that should theoretically brighten the fiscal outlook, reduce the risk of the nation losing its sovereign credit rating, and ease fears that the upcoming election will be founded on dramatic changes to policy already put into place. However, the actual consequence of this statement is marginal. Next week, the sterling will have to fend off a deeper contraction. The whims of risk appetite will be a constant concern given the dependency of the economy’s health on normal functioning markets and a strong trade. More tangible though is the scheduled event risk. Credit numbers, mortgage approvals, consumer confidence and housing data is all scheduled for release.
Japanese Yen Could Move on Growth, Financial Progress in the Absence of Clear Risk Aversion
Filling one of the two vacant seats at the Bank of Japan, new board member Ryuzo Miyao does not look as if he will increase the tension between the central bank and government. While suggesting fiscal concern is spreading, he agreed that the expanded credit facility will have a positive effect. Going forward, we will turn back to scheduled event risk for an assessment of the yen’s health (as opposed to just risk trends). Among key indicators scheduled for release are: the Tankan survey, industrial production, retail sales, employment and consumer spending.
Commodity Bloc Currencies Diverge from US Dollar, Risk Trends
While the US dollar was on the decline and equities were generally positive Friday, the commodity currency-based majors actually declined. This unusual turn of events is another indication (just from the other side of the risk spectrum) that underlying sentiment is stagnating. Next week, the Aussie, kiwi and loonie all have a few scheduled releases; but it is the Canadian GDP report for January that tops this list.
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
Written by: John Kicklighter, Currency Strategist for DailyFX.com
E-mail: jkicklighter@dailyfx.com
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