DailyFX | March 5 2012 10:15 EST
If we break down the US dollar’s performance against its most liquid counterparts, a clear fundamental split arises. Against the high-yield, investment currencies, the greenback gained traction; while its European counterparts were slightly higher on balance.
Dollar Gains Against Risk, Slips Against European Currencies
If we break down the US dollar’s performance against its most liquid counterparts, a clear fundamental split arises. Against the high-yield, investment currencies, the greenback gained traction; while its European counterparts were slightly higher on balance. The fundamental interpretation in this mix is relatively straightforward: traditional investor sentiment weakened to leverage the greenbacks’ liquidity appeal and Euro-area financial headlines spoke to slow steps towards stabilizing the region. For dollar bulls, the exacerbation of Europe’s financial crisis and a rebalancing of the risk / reward equilibrium carry the greatest potential for the single currency – though it is easy to argue that risk trends carry the greatest influence over time. Speaking of the dollar’s safe haven appeal, the opening 24 hours of trade this week was defined by a notable correction in equities and carry interest. In fact, technical traders can note that the channel that has defined the S&P 500’s steady bull trend from December 21st was breached with the session’s close. Avoiding the long-term evaluation arguments for why a correction can turn into a true reversal, an immediate catalyst for the soft start for the week was the Chinese Premier’s downgraded the 2012 growth forecast (to 7.5 percent) for the first time in eight years. And, since the market was already in a bearish mindset, Dallas Fed President Fisher’s suggestion that Wall Street was ‘addicted’ to cheap Fed money and needed to prepare for a withdrawal offers a much-needed dose of reality. But will it last?
Euro: Greece Bond Swap Immediate Concern, Ireland and Portugal Gaining Prominence
The euro wouldn’t put in for a strong performance of its own Monday, but it sure did take advantage of a weak showing amongst the carry currency crowd. Pairs like EURAUD, EURNZD and EURCAD are excellent fundamental barometers at the moment as they help us to gauge which is the more influential theme: basic risk trends or the more convoluted Euro-region crisis. There are a few critical deadlines this week for the Euro and the financial system that it represents. Two events that should be in every traders’ calendar are the Thursday deadline for private sector investor (PSI) participation in Greece’s bond swap and the EU Finance Ministers’ call on Friday. The drama continues for Greece as we find both the IIF (the group that represents the private bond holders) and Greek Finance Minister Venizelos splashing headlines with individual warnings about how bad things can go – of course if their respective plans are not pursued. This public jawboning will no doubt continue, but it won’t like carry weight until it comes to the actual bond swap. In the meantime, we take note of two developments that leapfrog us past Greece. Moody’s warned that Italy may need a second bailout while Portuguese Prime Minister Coelho said he wouldn’t revise his raised deficit target.
Australian Dollar Ready for a String of High-Impact Event Risk Starting with the RBA
We are soon to start a heavy round of event risk for the FX market’s favorite carry trade, the Australian dollar. We kick off the fireworks with the upcoming RBA rate decision. It is unlikely that Governor Glenn Stevens and company will change the benchmark (there is a consensus amongst Bloomberg economists that there will be no change and the market is pricing in approximately a 15 percent chance of a cut), but there is always the possibility that the authority takes a different tack on their language as to future changes. Aussie trades should look for the obvious rhetoric that inflation is under control and growth is slowing as that is the most recognizable lead in to rate cuts going forward. Yet it doesn’t end there. We must also be on the lookout for hints of concern for the level of the currency. The Aussie dollar has been drug down by the tentative risk aversion slip, but it is still holding important levels. A key catalyst can rectify that. And, if the fails, we have GDP and jobs numbers going forward.
New Zealand Pulling Away, Difficult to Stray from Risk for Too Long
While fundamentals were stirring, there weren’t many particularly impressive moves for the day. The exception, though, was the New Zealand dollar’s tumble across the board. Safe havens faired best, but fellow investment currencies (the Australian and New Zealand dollars) would post hearty gains of their own. Looking for the kiwi’s particular weakness, we find interest rate expectations are relatively stable (at neutral) and important agricultural commodity prices were doing well. Perhaps a fundamental concern was New Zealand Finance Minister English’s report that tax revenues came in below forecast at NZ$946 million. He noted that returning to surplus wouldn’t be easy.
British Pound Performance Restrained by Euro, Service Sector Cools
The 20-day correlation between EURJPY and GBPJPY is currently 0.98 (1.00 is a perfect lockstep). Where the euro heads, the sterling will be drug along. That said, we still find movement from EURGPB. In this particular pair, we can gauge how easily the spread of Euro Zone fear or relief moves to the periphery (the European Union members that don’t share the currency). In looking to avoid the region’s financial crisis, the market is keeping a close eye on the balance between growth and austerity. The BCC (British Chamber of Commerce) called on Minister Osborn to use stimulus to support the economy, though the February service sector PMI seems to round out a view of first quarter growth.
Japanese Yen Advances against All its Counterparts, Risk Aversion has a Preference
The worst performance currency this past month, the Japanese yen is naturally prone to a bounce. That doesn’t mean that a fundamental and sustained recovery are on the way, but a pullback on the speculative shorts is always a risk. In this past session, the modest risk aversion shift clearly benefited the market’s most renowned funding currency. In fact, the yen outperformed both the dollar and Swiss franc for the top spot. We could extrapolate and interpret this as a sign that the yen is the best play on true risk aversion; but more likely, it is just a sign that the currency is most oversold amongst its counterparts and thereby most sensitive to a correction.
Gold Extends Consolidation, Greece Would be a Good Catalyst
Gold can’t seem to find traction (bullish or bearish). Still spinning from the massive sell off last week, the precious metal found itself in another consolidating range this past session. Without the dollar on the move or the European financial situation driving capital away from fiat (promissory assets), there is little active impetus for the metal. That said, we have plenty of scheduled event risk ahead of us. The best bet for a bullish move is renewed fret surrounding Greece, while bears should keep a close eye on the dollar possibly gaining traction.
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Next 24 Hours
BRC Sales Like for Like (YoY) (FEB)
Retail sector still weaker
Current Account Balance (Australian Dollar) (4Q)
Australian trade sees continued outflow due to lower exports
Australia Net Exports of GDP (4Q)
Labor Cash Earnings (YoY) (JAN)
Labor market still in deflation
Reserve Bank of Australia Rate Decision
Widely expected to hold as there are signs of recovery in Asia
Euro-Zone Government Expenditure (QoQ) (4Q P)
Preliminary GDP expected to be same as previous, though Greek and peripheral debt still in focus rather than growth
Euro-Zone GDP s.a. (QoQ) (4Q P)
Euro-Zone GDP s.a. (YoY) (4Q P)
Euro-Zone Household Consumption (QoQ) (4Q P)
Euro-Zone Gross Fixed Capital (QoQ) (4Q P)
Ivey Purchasing Managers Index s.a. (FEB)
Canadian sectors weaker
AiG Performance of Construction Index (FEB)
Australian construction fading
Official Reserve Assets (FEB)
BoJ continues to buy assets
Halifax House Price (3MoY) (FEB)
British house prices continuing to fall, though additional easing questioned
Halifax Plc House Prices s.a. (MoM) (FEB)
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--- Written by: John Kicklighter, Senior Currency Strategist for DailyFX.com
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