DailyFX | June 9 2012 1:38 EDT
The euro’s progress this past week was a mixed bag. Where the currency recovered lost ground against key safe havens (the US dollar and Japanese Yen), the investment currencies outpaced the currency.
Dollar Traders Await Risk Trends to Decide Further Lift
It was an appropriate way for the dollar to close Friday’s session – virtually unchanged through the close. However, the shift in momentum was clearly visible with the weekly performance. The first weekly lose in six weeks throws the breaks on best run for the Dow Jones FXCM Dollar Index since a similar length move through May of 2007. This is not a full blown shift in sentiment; rather it is a pause for another fundamental catalyst to decide the next leg. If it were for speculators weighing the possibility of stimulus guidance this past week, we would most likely not have had this trend break. Alas, we must trade what is in front of us and the sentiment of the masses chooses our direction and pace.
Through the last 24 hours of this past week, there was little on the US newswires stirring the market. Instead, the greenback was taking its cues from equities and other growth-sensitive markets. Transitioning from an open that was still feeling the withdrawal from Fed Chairman Bernanke’s refusal to reassure stimulus expectations, the markets eventual moved on to reports that Spain would officially seek external support for its banking sector over the weekend. For the safe haven dollar, the possibility that one of the most pressing threats to market stability could find short-term resolution means that the heavy market-wide risk aversion current that provides lift could evaporate – potentially drawing a correction.
Beyond the weekend headlines, there are few other key, fundamental catalysts that can move the behemoth that is the consensus on risk trends. Gaining traction and building momentum over the entire capital and credit markets is especially difficult knowing that there is far more bombastic event risk in the following weeks (the Greek election, EU Summit, G20 meeting and the Fed rate decision). Yet, a curb on cross-market correlations and dramatic shifts in speculative expectations doesn’t mean we won’t be find meaningful volatility. Aside from keeping tabs on risk trends, the US docket will provide a range of policy officials’ speeches as well as media-friendly data (retail sales, TIC flows and CPI).
Euro: Officials Scramble to Stabilize Spain Before Greece Returns
The euro’s progress this past week was a mixed bag. Where the currency recovered lost ground against key safe havens (the US dollar and Japanese Yen), the investment currencies outpaced the currency. In this observation we find that the perceived improvement in Europe’s financial disorder did not outpace primal risk appetite trends – though it likely opened the door for short-covering and opportunistic bottom-picking. Spain was the main topic Friday and it will remain so over the weekend and likely into the following week. Speculation that the country will formally request assistance for its banking system has clearly captured the attention of the masses. That there is a call for support isn’t particularly surprising – the nation’s budget minister essentially led the call days before. Yet, the need for assistance has been leveraged recently with Fitch’s downgrade and Moody’s warning. If a program is not hammered out over the weekend, or if the market deems it insufficient, it could leave the euro far more sensitive to speculation of trouble in Spain, Greece or perhaps others EZ members like Italy. A few other scheduled highlights to keep a leery eye on: the €1.25 billion Greek bill auction Monday and ECB Draghi’s speech Friday.
British Pound Holds Steady as Upstream Inflation Pressure Drops
While we wait to see if the Euro crisis indeed is contagious (because the UK has the greatest exposure to the region’s troubles outside of the actual Euro Zone), sterling traders are assessing whether policy officials will try to stabilize and devalue the currency through further easing. Notable, but largely overlooked, on Friday was the sharp drop in input (read upstream) produce prices. Another subtle piece of evidence to encourage the MPC members to be more sensitive to growth and financial stability risks. In the upcoming week, monetary policy will remain on the mind. Of particular interest is the prepared speaking engagement for BoE member Adam Posen Monday. The dramatic change in stance from this persistent dove took the market by surprise not long ago, but data is no doubt pulling him back to the dark side.
Japanese Yen at the Mercy of Crisis Current, BoJ On Deck Again
The yen crosses are finally starting to rebound, but it has nothing to do with the threats or even actions of the Ministry of Finance or Bank of Japan. This is a straightforward rebound in risk appetite that draws a little carry interest. It should be said, however, that taking on a carry trade is not naturally a short-term market position. Therefore, to truly build selling pressure behind the yen, risk appetite trends need to find serious tailwind. In the meantime, expectations for the Bank of Japan rate decision due late in the week are set low. The consensus is for no change in policy, but the market belief is that it wouldn’t have an impact even if they did move. Will they start to entertain uncommon policy?
New Zealand Dollar Could Find Boost in RBNZ Hold, But Risk Trends Dominant
Of the three rate decisions this coming week, the RBNZ seems to be the least critical. Both the BoJ and SNB are facing difficulties with their currencies which generates market interest whether they move or not. For the high-yield kiwi dollar, a hold is a boon. Recently we have a moderate pressure in expectations for rate cuts significantly abate (there is now an 18 percent chance of a 25bp cut at this meeting and 21bps worth of cuts priced in over 12 months). It should be said, the most unexpected events generate the biggest reaction.
Swiss Franc: Will the SNB Use its Policy Meeting to Take New Tack?
Over the past few weeks, we have seen the SNB report that its FX reserves have surged in its fight to maintain the 1.2000 EURCHF floor and that the group is considering alternative methods for relieving the pressure. If there was ever a good opportunity to announce new efforts so that there wasn’t too much shock, it would be the official rate decision. Does that make it a more likely outcome? Not really.
Gold Recovers Late Friday as Euro Stimulus Compensates for QE3
Through the first half of Friday, gold extended its aggressive reversal – at one point leveraging the reversal from Wednesday’s high to more than a five-percent drop. Yet, through the end of the day, the metal recovered all of its Friday losses. It is interesting that this occurs at the same time that Spain is expected to find relief – drawing stimulus to do so. While Fed QE has more sway on gold, EU stimulus should weigh here too.
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Upcoming Events & Speeches
Spain Expected to Make Formal Request for Bank Support
ECB Announces Bond Purchases (SMP)
BoE's Adam Posen Speaks on U.K. Economy
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