Currencies | May 30 2011
By John Kicklighter, Currency Strategist
– Dollar: Expect Little from NFPs, Keep a Wary Eye on the S&P 500 and Talk of the QE2 Expiration
– Euro Traders Will Quickly Return to Greece and Other EU Troubles Going Forward
– British Pound Finds Little Confidence in BoE Dale’s Growth Outlook, Sentance's Exit
– Canadian Dollar Faces both BoC Rate Decision and 1Q GDP but are They Market Moving?
– Australian Dollar will Gauge Fundamental Health, Rate Outlook with Rate Decision
– New Zealand Dollar’s Rally Looking Extended When Fundamentals are Taken into Account
– Gold Off Record Euro, Aussie Dollar Highs at Week’s End but Trouble Ahead Can Offer a Bid
Dollar: Expect Little from NFPs, Keep a Wary Eye on the S&P 500 and Talk of the QE2 Expiration
The dollar suffered its worst weekly performance in a month. What initially looked like a promising open to the period, quickly turned into a dramatic decline for the struggling greenback as the few fundamental compliments for the currency have failed to gain traction. Despite the potential indirect benefit the dollar could garner from uncertainty surrounding Europe’s financial difficulties or speculation ahead of the Fed’s cap on the second, $600 billion quantitative easing (QE2) program next month; the FX crowd once again deferred to risk appetite and the sparse return to be found from the benchmark currency. The fourth consecutive daily advance from the S&P 500 through Friday – the best run since April’s advance to multi-year highs – mirrored the equivalent decline from the Dow Jones FXCM Dollar Index. Yet, it is worth noting that the pace of the equity market’s gains was far more restrained than the selling pressure for the currency. What’s the difference here? Risk appetite is relatively weak; but the exceptionally-low US rates leverage the market’s aversion to the currency.
Heading into the new trading week, risk appetite could further lose its momentum – giving the dollar some relief. Monday’s session will be naturally dampened by the extended holiday weekend (US markets will be closed in observation of Memorial Day). And, while there is certainly room for an unexpected development spurring the market’s to life while a large segment of liquidity is offline; we are far more exposed to panicked selling than we are to enthusiastic buying under current conditions and at current levels. The scheduled docket through the rest of the week is remarkably dense. The ISM manufacturing and service sector activity surveys, consumer confidence and construction indicators are all notable; but most market participants will be focusing on the May nonfarm payrolls (NFPs). The employment statistics are historically the most influential data for short-term market impact; but recently, the data has generated little in the way of sustained momentum. This time around, the immediate reaction to the data will likely be just as restrained. That said, we should pay close attention to the data nonetheless as ‘full’ employment is one of the Fed’s two mandates (along with inflation). Sustained improvement in both the jobless situation and wave growth would offer tangible evidence that the central bank is moving towards that inevitable change in monetary policy.
Ultimately though, it is not the first rate hike that matters most but rather the withdrawal of stimulus. With the Fed’s balance sheet now at $2.78 trillion, there is a lot of excess capital floating around the market; and this surplus is cross border investments. When the central bank signals the change in tides; capital will be absorbed, rates will rise and then speculative investment will actually follow the carry unwind into the US.
John’s Picks: Looking for Breakouts on Pairs Like AUDJPY and Trends from EURUSD
Euro Traders Will Quickly Return to Greece and Other EU Troubles Going Forward
EURUSD has certainly firmed this past week; but that does not mean the euro is any fundamentally stronger – this particular move is more appropriately labeled as dollar weakness. The greatest threat to the stability of the shared currency is still the uncertainty surrounding the future of Greece in the European Union. There are prominent proponents for the country to restructure (technically default) and say the alternative would be disastrous; and those that say a restructuring would be “horrible”. The argument may be settled if the country doesn’t meet the requirements to receive its next round of support next month. If risk appetite eases at all next week, the euro’s troubles will fill headlines.
British Pound Finds Little Confidence in BoE Dale’s Growth Outlook, Sentance's Exit
The already-deflated hawkish interest rate forecast for the pound will take another substantial blow next week. MPC member Andrew Sentance's term comes to an end; and with his departure will go the central bank’s most hawkish voice. In his place we will have Ben Broadbent (his views are unclear); and in the meantime, one of the only two hawks left (Spencer Dale) says the growth outlook is “relatively bleak.”
Canadian Dollar Faces both BoC Rate Decision and 1Q GDP but are They Market Moving?
We have a big week ahead for the Canadian dollar. Though the employment data has been moved back to the Friday after the NFPs hit; we have the Bank of Canada rate decision and 1Q GDP figure to hold us over. The growth reading holds the greatest potential for surprise; but it is the policy decision that should be most interesting. Though no rate change is expected, the BoC’s 12-month forecast still tops the majors.
Australian Dollar will Gauge Fundamental Health, Rate Outlook with Rate Decision
There is little that seems to sway the Australian dollar off its path other than risk appetite trends themselves – a rising equities market maintains a remarkable correlation to the rising Aussie. However, the currency’s link to sentiment can indeed change. The 1Q GDP figures due early Wednesday are expected to print a contraction – not an encouraging outcome for a currency looking to maintain its yield advantage.
New Zealand Dollar’s Rally Looking Extended When Fundamentals are Taken into Account
The second strongest currency this past week was the New Zealand dollar (the first was the Swiss franc). Yet, the source of this strength is difficult to point to. Demand for higher yield is certainly a component; but that should theoretically boost the higher-yielding Aussie more. If the kiwi was boosted by suggestions that China plans to invest in the island economy; its buoyancy will quickly wear off and the currency retreat.
Gold Off Record Euro, Aussie Dollar Highs at Week’s End but Trouble Ahead Can Offer a Bid
A bullish end to the week wouldn’t make up for gold’s slide from record highs when priced in euro’s and Australian dollars. The standard performance measure in dollars is saturated by the greenback’s weakness; so we look at the commodity’s price in higher yielding currencies to establish the real appetite. Concerns about the European Union, Chinese markets, US and Japanese debt could keep capital moving to gold.
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