24 January, 2013
Dollar, Risk Trends Steady Despite House Debt Approval
The fundamental tide continues to grow, yet speculative trends refuse to be driven from their stubborn state of stasis. That is a burden for the US dollar which still plays a dominate role in the FX market as a safe haven and reserve currency. For the Dow Jones FXCM Dollar Index (ticker = USDollar), the detachment from the undercurrent of risk trends likely saved it from a serious extension of the reversal from six-month highs set at the end of last week. Instead, the Index closed virtually unchanged near 10,100. Across the majors, the lack of drive is less comforting for the greenback. EURUSD has turned to congestion at 11-month highs below 1.3400 and AUDUSD is stationed just below well-worn resistance at 1.0600 that defines 10-month highs. The market’s apathy will not last forever, and proximity to ‘risk on’ can encourage a bearish dollar trend.
Looking over the event risk that crossed the wires this past session, it is remarkable that capital markets and the dollar would refuse a significant swell. A few of the developments on the day played directly to the market’s primary fixations of the past weeks and months. At the top of the list was the US House of Representatives’ vote to temporarily extend the deficit ceiling out to May 19. According to a Bloomberg survey, the ongoing US budget clash is the top concern for the greatest number of market participants (36 percent). That explains the rally from both the S&P 500 and US dollar following the Fiscal Cliff deal on January 2. Yet, this bid to buy another three months was met with little relief or rally from either. There may have been too much time still left on the clock to spur a risk rally or perhaps the investors are waiting on the Senate and White House to approve the bill. While this removes another major hurdle for risk trends, the lack of influence on price suggests it may be largely priced in.
Yet, were we to think the market’s tepid response to a meaningful update on the deficit wrangling was a sign that bears were gaining a foothold, we would also witness a disregard of two events that would otherwise stoke risk and rally the dollar. Earlier in the US session, the IMF released its updates for worldgrowth forecasts. The downgrade for the global economy’s 2013 performance (3.5 from 3.6 percent) encompassed significant downgrades for the US, Eurozone, Japan and UK amongst others. Later on, the focus turned back to the earnings season as market leader Apple reported Q1 2013 earnings per share (EPS) that beat estimates. However, it was the revenue miss and weaker guidance for the following quarter that sent shares after hours tumbling the most since the peak of the financial crisis. Despite this, no dollar reaction.
Euro Shows Further Retreat from Crisis but EURUSD 1.3400 Top Remains
In the same Bloomberg survey mentioned above, the revival of the Eurozone crisis was the second greatest concern that investors foresaw (drawing 29 percent of votes). We have seen the reversal of ‘tail risk’ in the region leverage a considerable recovery for EURUSD since last July when the European Union (EU) and European Central Bank (ECB) vowed extraordinary steps to stabilize the region’s financial system. Nevertheless, we have seen some of the most at-risk members in the Eurozone show significant progress this week – yet another surprise for the market’s lack of reaction. Tuesday, Spain sold bonds to record demand; and this past session, Portugal reenteredthe market for the first time since being rescued to strong support as well. Meanwhile, the Bank of Spain took the occasion to downgrade 4Q GDP growth expectation to -0.6 percent as well as its 2013 forecast. The Eurozone economy is expected to suffer a recession through this year, and that fear can find more tangible grounding in the upcoming session when PMI figures are released. The monthly activity reads are timely proxies to GDP figures.
British Pound: Drop in Jobless Claims, Cameron Referendum Elicit Little Trader ResponseThe British pound faced its heaviest docket in months, and the event risk barely stirred the currency. Much of the calendar fodder was disarmed well before hand. Prime Minister David Cameron’s speech on the UK-EU referendum (‘In/Out’) was defused with the market working through expectations through the end of last week. The Bank of England (BoE) minutes is habitually lacking for influence, but BoE Governor King gave a heads up on the disappointing growth outlook earlier this week and the openness to further easing surprised no one. The only genuine surprise was the 12,100-filing drop in jobless claims that lowered unemployment levels to the lowest since June 2011. And yet, no serious pound gains.
Japanese Yen Advance Stalls at Critical Levels for Progress
To fulfill a serious reversal and call a dramatic end to the USDJPY’s remarkable 10-consecutive week rally, the yen may need a catalyst. Having move so far, so quickly; a correction seems a serious risk. That inclination to take profit or speculate on a pullback has yet to take hold, however. With the Bank of Japan’s plan to introduce a major stimulus push at the beginning of next year, this is another currency that is lacking for a critical driver. What is the best, potential driver from here? Risk trends. But we are all too familiar with the state of speculative trends right now.
Canadian Dollar Unexpectedly Tumbles after Bank of Canada Cuts Growth Outlook
Remarkably, the most market-moving currency for the day through an otherwise loaded docket was the Canadian dollar. A reflection of what genuine surprise can accomplish in the market, there was little expectation for the Bank of Canada’s (BoC) policy decision. Yet, a downgrade in growth forecasts and language that extended the time to the first rate hike leveraged a market-wide drop for the Canadian currency.
Australian Dollar Sees Rate Forecast Ease after CPI, Chinese PMI Offers Little Volatility
Following up on the modest miss on the 4Q CPI figure from yesterday, we find 12-month interest rate forecasts for the Reserve Bank of Australia (RBA) have deteriorated to the lowest level since the beginning of the year – perhaps reversal the build in hawkishness since October. Meanwhile, the Aussie dollar’s tame slide found no further encouragement from the Chinese manufacturing PMI beat from this morning.
Gold Drops as House Delays Budget Crisis and Dollar Holds Steady
Progress on the US debt ceiling concern could have throttled gold higher this past session if risk trends were engaged. If sentiment were sensitive to the ebb and flow of fundamentals, the greenback would likely have dropped after such a prominent risk was tamed. Subsequently, gold would have gained on the currency’s pain. Instead, the reduced pressure on currencies in general weighed the precious metal.
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