Currencies | Feb 07 2011
By John Kicklighter, Currency Strategist, DailyFX
Fundamental Forecast for the US Dollar: Neutral
The unemployment rate may have dropped to a 21-month low; but the outcome is far from encouraging
Both service and manufacturing sector activity surveys swell in January, but is this growth?
View our six-month US Dollar Outlook
The dollar has come a long way in just a week’s time. Through the second half of this past week, the dollar was starting to find its footing in what looks to be a tentative recovery. Yet, doubt over whether this is a true, bullish reversal should be preserved considering we had similar speculative hopes dashed just a week before when a sharp rally for the dollar and the long-awaited channel break from the S&P 500 were subsequently reversed after the weekend. What led the greenback to gain ground this past week is what we need to establish. The deeper the fundamental roots to this effort, the more probable carry through will be on a true bull phase. That said, without a solid foundation, the benchmark currency could be up for another swift tumble.
Looking over the past week, the dollar could have drawn its strength from two particular sources: high-level event risk or risk appetite trends. The data flow was particularly interesting for its rounded look at the broader economy. A view of the consumer and business health offered a direct look into whether the US economy was on a fast track to surpass its global counterparts for growth and returns. Where personal spending, manufacturing activity and service sector activity all carved out gains; a vigilant fundamental trader would really hone in on the disappointing employment breakdown and the PCE-based inflation figures. Where the net payrolls were a disappointment for missing their mark; the jobless rate only improved with a record frustrated American’s leaving the labor force and the participation rate tumbling dot its lowest level in 26 years. This puts growth into perspective. Without employment and wages improving, the economy will not continue to expand at its current clip. And, as for the Fed’s favored inflation indicator, a record low sets a very poor precedence for interest rate speculation.
Data was not very encouraging last week; so perhaps the dollar took the initiative to capitalize on a risk aversion move. And yet, our benchmark for sentiment (the S&P 500) was still pushing two-and-a-half year highs. Going forward, it will be exceptionally difficult for the dollar to sustain – much less leverage – its burgeoning rally if sentiment does not start to deteriorate market-wide. There are just a few prominent catalysts that can meaningfully encourage the greenback higher at this point; and risk appetite trends is at the top of the list. An ideal situation for the safe haven currency would be an aggressive and correlated tumble in equities, corporate debt and speculative commodities along with a subsequent rally in gold, money markets and the funding currencies. One or two of these factors would present limited backing. As for the data on hand, don’t expect meaningful volatility to follow the releases. Consumer credit will take measure of lending conditions, the NFIB small business optimism will gauge hiring expectations for the largest employer group, the monthly budget will track the push to the deficit cap and the University of Michigan sentiment survey will gauge Americans’ willingness to spend. None of this though materially alters the US’s relative pace of growth, risk appetite trends or the timing for rate hikes.
And, though as traders, we should take stock of the immediate threats on our radar; it is also important to keep tabs on the longer-term developments. Concerns that will weigh more heavily in the not-so-distant future are the underperformance of domestic yields, the burden of a record deficit and the eventual withdrawal of stimulus. Just keep those concerns in mind.
The views expressed are not FNArena's (see our disclaimer).
For real time news and analysis, please visit http://www.dailyfx.com/real_time_news
DailyFX provides forex news on the economic reports and political events that influence the currency market. Learn currency trading with a free practice account and charts from FXCM.
www.dailyfx.com
Disclaimer
Forex Capital Markets is headquartered at Financial Square 32 Old Slip, 10th Floor, New York, NY 10005 USA.
Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before you decide to trade the foreign exchange products offered by Forex Capital Markets, LLC, Forex Capital Markets Limited, inclusive of all EU branches, FXCM Asia Limited, or FXCM Australia Limited, any affiliates of aforementioned firms, or other firms under the FXCM group of companies [collectively “FXCM Group”] you should carefully consider your objectives, financial situation, needs and level of experience. If you decide to trade foreign exchange products offered by FXCM Australia Limited you must read and understand the Financial Services Guide and the Product Disclosure Statement. FXCM Group may provide general market information and commentary which is not intended to be investment advice and the content of this email must not be construed as personal advice. By trading, you could sustain a total loss of your deposited funds and therefore, you should not speculate with capital that you cannot afford to lose. You should be aware of all the risks associated with trading in foreign exchange products. Foreign exchange products are only suitable for those customers who fully understand the market risk. FXCM recommends you seek advice from a separate financial advisor.
FXCM Group assumes no liability for errors, inaccuracies or omissions in these materials and does not warrant the accuracy or completeness of the information, text, graphics, links or other items contained within these materials. FXCM Group shall not be liable for any special, indirect, incidental, or consequential damages, including without limitation losses, lost revenues, or lost profits that may result from these materials. This email is not a solicitation to buy or sell currency. All information contained in this e-mail is strictly confidential and is only intended for use by the recipient. All e-mail sent to or from this address will be received by the FXCM corporate e-mail system and is subject to archival and review by someone other than the recipient.”
Technical limitations
If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.
