DailyFX | June 2 2012 12:36 EDT
Friday was an unusual day for the US dollar. By any standard, the global markets were drowning under a particularly acute risk aversion drive.
Dollar: Talk of Crisis Competing with Rumor of Stimulus Post NFPs
Friday was an unusual day for the US dollar. By any standard, the global markets were drowning under a particularly acute risk aversion drive. For the S&P 500 – a benchmark for sentiment that is backed by the fabled stimulus spells the Federal Reserve casts – the fundamental outlook was dire enough to deliver the index its biggest daily hit since November 9. At the same time, equities-based VIX volatility index hit a new high for the year (26.7 percent) while the currency market equivalent did the same (12.3 percent). These are the kinds of conditions that the liquidity-derived, safe haven greenback typically flourishes in. And yet, the Dow Jones FXCM Dollar Index produced a second daily decline…
The eventual bearish close for the benchmark currency should not be overstated. The weak close came after an incredible morning rally that was later retraced – which is even more unusual. From the individual currency pairings, the rebound for the yield-intense crosses is unusual, the cable’s (GBPUSD) consistent was true, USDJPY found carry interests outpacing liquidity, but it was EURUSD’s biggest rally in two weeks that truly departs from the market consensus. This particular pair generally reflects the underlying tensions of the market and tracks the move away from the world’s most troubled region. So then, why did we find a bounce on a day where blatant risk aversion was the order of the day? Hope. After May NFPs posted a sizable miss (69,000 versus 150,000 expected), lingering fears were sharply amplified…amplified to the point where moral hazard kicked back in and expectations for fresh rounds of stimulus started to tickle rally-fantasies.
A preemptive effort to prevent another crippling financial situation is always the best policy, but rarely are these efforts made unless the duress is threatening systemic functioning of the system. Aside from a market-wide meltdown, there aren’t many opportunities for the Fed to open the flood gates – they do have the June rate decision the following week (which is the last meeting before Operation Twist ends this month). That said, speculation usually wins the day for market influence. We have the Beige Book and Bernanke testimony before the Joint Economic Committee in the upcoming days. Furthermore, there is growing speculation of action from the ECB, BoE, PBoC, BoJ and SNB to consider…
Euro Crisis May Have Become Infectious, Will the EU and ECB Act?
If we had to put a label on the Euro’s fundamental performance (not price action) for Friday, it would be ‘bearish’. That isn’t particularly surprising given the consistent deterioration of the Euro Zone’s financial health these past weeks. Yet, recently, have seen repetitious headlines and news that really isn’t news carry the bears forward. On Friday, we did see yields suffer further, credit default premiums rise, Italy take a downgrade form Egan Jones, a 12-year high in Italian unemployment and a raise forecast for Portuguese joblessness for 2012; but these developments aren’t necessarily of the caliber we would expect to drive us further towards 2-year lows. Unless Spain’s financial situation significantly deteriorates or Portugal decide to play catch up (they have a bond auction this coming week), we have a break until Greece’s second election on June 17. In the meantime, the ECB has the opportunity to perhaps restart its SMP or cut rates and/or offer more stimulus at its rate decision.
British Pound Suffers Hearty Losses Against Majors This Past Week
The British Pound is an interesting position. While the euro was waging a rebound against the US dollar, GBPUSD would close out its fourth consecutive daily decline on a very prominent range of support that traces back two years. A perceived improvement in the Euro-crisis situation will be immediate (if temporary) relief for the UK – the stepping stone for a global crisis spread. That said, the sterling has its own issues: like thinned liquidity due to the holiday period and the possibility that the BoE could announce more bond purchases (low threat, but still there).
Japanese Yen: Did the Bank of Japan Intervene?
There was a tremendous level of volatility the final 24 hours of the trading week, and even the most liquid pairs (EURUSD) were showing unexpectedly sharp reversals. However, USDJPY in particular seems to have carved out an incredibly volatile intraday swing. There is heavy speculation that a move of this extent was clearly an intervention effort by the Finance Ministry or Bank of Japan. Policy officials deny it, though, and traders that process their positions say it wasn’t the case either. Yet, if we are moving into further crisis, they may have to act.
Australian Dollar Under Pressure with RBA, GDP and Jobs on Deck
Speculation has dominated the Australian dollar’s course and pace these past weeks and months. It is interesting to note then that we will finally find some tangible evidence for market’s to work with in the upcoming week. We have a range of very important, fundamental release that we must watch: an RBA rate decision, a 1Q GDP release and May labor statistics. Most critical in this mix is the rate decision – as it taps into the trifecta of fundamental fears (risk trends, yield and China). Keep an eye on backdrop sentiment trends though throughout the week.
Canadian Dollar: Now is the Chance to Regain its Footing with Jobs and BoC
The Canadian dollar was the worst performing currencies of the majors this past Friday thanks to the double hit of a disappointing US employment read (the United States is Canada’s largest trade partner) and a weaker-than-expected March GDP reading. Was that really enough to drive the loonie down that quickly though? The currency is particularly sensitive to trouble because of its independent, hawkish rate outlook. The BoC could secure the currency’s good name if it feeds the rate outlook. Otherwise, we watch risk trends and await Friday’s jobs data.
Gold Enjoys its Biggest Daily Rally Since January 2009, Is this a QE3 Sign?
If there was a clear winner over the final trading of this past week, it was gold. With risk aversion on high gear and the dollar struggling to gain the traction it usually finds in flights of fear, the alternative safe haven posted an incredible, 4.1 percent rally – the biggest single day climb since January of 2009 (the tail end of the worst financial crisis in record history). So, gold surges while the dollar struggles when liquidity demand should be cresting. This joins an interesting list of fundamental performances that suggests the market is pricing in near-term QE3.
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**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar
Next 24 Hours
Monetary Base (YoY)
A measure of inflation for a country without.
TD Securities Inflation (MoM) (MAY)
Both markets and economists expect an RBA rate cut, this will cement expectations.
TD Securities Inflation (YoY) (MAY)
Company Operating Profit (QoQ) (1Q)
Corporate activity will be a good lead in to the main event – 1Q GDP figures.
ANZ Job Advertisements (MoM)
Another lead in indicator to the later release labor stats.
Euro-Zone Sentix Investor Confidence (JUN)
The financial fires are stoked, how have investors fared?
Euro-Zone Producer Price Index (MoM) (APR)
Secondary inflation figures will carry little sway over the ECB last minute.
Euro-Zone Producer Price Index (YoY) (APR)
ISM New York (MAY)
Regional and national factory figures have slowed recently, raising figures of recession.
Factory Orders (APR)
AiG Performance of Service Index
Meaningful granularity but likely to be lost ahead of the RBA and in advance of the 1Q GDP aggregate.
Australia Net Exports of GDP (1Q)
Current Account Balance (Australian Dollar) (1Q)
China HSBC Services PMI (MAY)
Most focus goes to manufacturing, but service sectors are important to a growing economy.
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