DailyFX | March 28 2012 11:15 EDT
The US dollar managed to close its second advance this week, but follow-through on this upswing will be more difficult to muster.
Dollar Climbs Second Day but Risk Move Easing, Rate Interest Fading
The US dollar managed to close its second advance this week, but follow through on this upswing will be more difficult to muster as we hit significant resistance on risk trends and positive interest rate expectations for the greenback. This past week, these two prominent themes have either engaged an active bull trend or worked to acted to prevent a deeper selloff. However, speculation on both fronts naturally hits headwinds early as both are backed by prominent and persistent trends. As our read on sentiment trends, the S&P 500 has retraced back to 1,400; yet breaking below this temporary threshold proved too high a threshold for a day that lacked for real catalysts. Moving forward, a simple break of this tidy level (or 1.0350 for AUDUSD, 2.40 for US Treasury rates or any other benchmark you follow for risk guidance) is possible – but follow through will be exceptionally difficult to raise without a strong catalyst. This is especially true for the next 36 hours with European officials expected to meet on an expanding their permanent stimulus fund on Friday – one of the primary catalysts for underlying sentiment recently.
For inherent fundamental drivers, the dollar has found a notable boost from a distinct shift in rate expectations. Though a change in consensus for the first Fed hike to occur sometime mid-2014 to mid-2013 seems distant, yields are so exceptionally low that even changes on this level carry a greater magnitude of influence. Furthermore, if the rate outlook is moving up, stimulus withdrawal forecasts will naturally move up as well. Given the increased speculation, the Fed’s April 25 rate decision will carry significant weight regardless of the commentary issued. In the meantime, the February durable goods statistics from this past session didn’t rouse much from capital markets or the dollar as the 2.2 percent pickup were marred by record inventory building. In the upcoming New York session, we have the final 4Q GDP figures – which are already well priced in – and another round of Fed speeches.
Euro Hit by Another Wave of Headlines, Expectations for Friday Anchors
The European headlines are growing increasingly flooded with updates – and it is leading to a higher degree of uncertainty for the euro. With the market looking for the greatest threat to a passive euro long, there are plenty of bones in the currency’s closet to find. Standard & Poor’s and Fitch both offered unflattering forecasts for regional growth, Spain’s Finance Minister found it necessary to speak out on concerns that his country would need a bond swap, Greece was seen failing to obtain a majority government in its upcoming election and the ECB lending figures for February showed rescue funds aren’t making it to the real economy. There are any number of threads in the European financial weave that can lead to the stability in the region unraveling; but for the short-term, we may have a stay on bearish ambitions. This past session, newswires reported ‘sources’ as suggesting this Friday’s EU meeting will find a consensus to boost the permanent bailout to €700 - 940 billion.
Japanese Yen will Find its Long-Term Bear Trend Restrained by Year End
I am a long-term USDJPY bull, but through the short-term there are too many factors holding the yen up to make it an easy (or good) decision to jump back in now. The threat of a meaningful risk aversion move that unwinds carry interest and levitates the funding currency is a consistent threat as the S&P 500. However, for USDJPY, carry deleveraging isn’t nearly as prominent a risk – there simply isn’t much outright carry behind the pair. Far more concerning for all yen-based pairs is one of the few seasonality effects in the FX market: the Japanese fiscal year end. The country official roles its financial year forward at the end of this month; and in the lead up, firms with operations outside the country will often repatriate funds. This is not an assured yen rally point (according to historical precedence), but it is a significant risk.
Australian Dollar Hits Fresh 5-Month Low Against Kiwi
Though it is sometimes difficult to envision, there is more to the Australian and New Zealand dollars than just the influence of risk appetite trends. To get away from this heavy fundamental driver, we need only look at the pairing between the two high-yield currencies (AUDNZD). From that pair, we see a steady decline (a drop for AUDNZD) to fresh Five-month lows. The driver here is the divergent path of interest rate expectations: over the coming 12 months, the RBA is expected to cut rates 71 bps and the RBNZ is seen hiking 25 bps. While current rates may seem the primary concern now, if you look at a real market rate like 10-year government bond yields, you see that the kiwi is actually a premium.
Canadian Dollar: FM Flaherty Says Budget Spending Cuts to be Small
Few scheduled events from the Canadian docket can encourage volatility from the Canadian dollar. However, the upcoming budget report certainly has that potential. We don’t often have policy change from the government or monetary authority in the country to alter its own place as a benefactor of US demand; but an expected cut in spending could tip those scales. Finance Minister Flaherty was on the wires talking about balancing the budget in the medium-term and said that the cuts will be modest.
British Pound Stumbles on GDP Data, Extends Decline on Risk
There was little to expect from the UK GDP data in sterling volatility terms, but the indicator actually impressed. Though a final reading (in other words a second revision to the original figures), the slightly larger 0.3 percent contraction in the economy through the fourth quarter caught a few investors/traders off-guard. The impact wouldn’t last long, and risk trends as well as general Euro-region issues had to add to the move. The ONS would also give us disappointing news with a report that showed real household income dropped 1.2 percent – the most since 1977.
Gold Dives as Dollar, Euro and Yen Lead Currency Group’s Appreciation
Gold dove across the board Wednesday. Few still expect risk aversion to be the primary catalyst for the metal – so the correction there shouldn’t have caught too many by surprise. Instead, we would look to the commodity’s intrinsic anti-currency role. With the dollar particularly on the rise through the session, it was a clear stumbling block for gold. That said, the dollar-based performance wasn’t the metal’s worst – an unusual circumstance. The yen, euro and Swiss franc all posted better performance against the commodity.
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Next 24 Hours
NBNZ Activity Outlook (MAR)
Bank’s own index stable, seeing some signs of recovery
NBNZ Business Confidence (MAR)
Job Vacancies (FEB)
Australian labor market improving
German Unemployment Rate s.a. (MAR)
German labor market expected to improve as debt crisis fades
German Unemployment Change (MAR)
Net Lending Sec. on Dwellings (FEB)
British credit and loans still weak, may result in more easing of credit
Mortgage Approvals (FEB)
Net Consumer Credit (JAN)
M4 Money Supply (MoM) (FEB)
Money supplies showing that the Bank of England could be ready to do more drastic policies
M4 Money Supply (YoY) (FEB)
Euro-Zone Business Climate Indicator (MAR)
Confidence indices showing slight improvement, though investment and spending still weak
Euro-Zone Consumer Confidence (MAR F)
Euro-Zone Economic Confidence (MAR)
Euro-Zone Industrial Confidence (MAR)
Euro-Zone Services Confidence (MAR)
Initial Jobless Claims (MAR 24)
Weekly data continues to rise
Continuing Claims (MAR 17)
GDP Price Index (4Q T)
Third revision of 4Q productivity expected to remain stable, may not move markets
Core PCE (QoQ) (4Q T)
Gross Domestic Product (Annualized) (4Q T)
Personal Consumption(4Q T)
GfK Consumer Confidence Survey (MAR)
British confidence still low
Nomura/JMMA Manufacturing PMI (MAR)
PMI in growth area
Jobless Rate (FEB)
Japanese labor market relatively unchanged
Household Spending (YoY) (FEB)
Spending falling at a slower pace
National CPI (YoY) (FEB)
Inflation data may move markets as BoJ focuses on a price target, targeting 1% from deflation
National CPI Ex-Fresh Food (YoY) (FEB)
National CPI Ex Food (FEB)
Industrial Production (MoM) (FEB P)
Industries showing continued in preliminary February data
Industrial Production (YoY) (FEB P)
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