Major Currencies vs. US Dollar (% change)
18 Apr 2011 – 22 Apr 2011
Dollar Anchored to Stock Market Performance
With most major currency pairs showing a well-defined correlation with risk sentiment, stock performance will continue to set the pace for FX price action in the week ahead. On balance, this seems to open the door for a recovery in the safety-linked US Dollar amid a return to risk aversion, with the bears seeing no shortage of compelling reasons to justify a selloff:
- The US Treasury will auction off $99 billion in 2-, 5- and 7-year debt this week with yields almost certain to rise after S&P downgraded its credit outlook for the States last week, threatening to further undermine an already fragile recovery even as GDP is tipped to add just 2 percent in the second quarter (down from 3.1 percent in the three months through March).
- The Federal Reserve is due to deliver its monthly rate decision, which this time around will be followed by the inaugural quarterly press conference from Chairman Ben Bernanke. The central bank chief is surely aware that public opinion is skewed his ultra-loose policy posture – indeed, this press conference is a direct outgrowth of that awareness – so it seems likely that he will use the occasion to begin outlining stimulus exit plans.
- China has reported increased the reserve requirements its top five banks once more in a bid to cool inflation, weighing on economic growth expectations in the world’s second-largest economy.
Coupled with lingering post-earthquake malaise in Japan as well as regular (if sporadic) reminders of the debt fiasco still festering in Europe, the top engines of global output appear badly battered, clearing the way for a long-overdue reversal across the spectrum of risky assets. With that said, identifying the breaking point to the Dollar selloff has proven consistently elusive over recent weeks even as the headwinds facing sentiment have been compounded. One can only suspect that when the turn does come, the bears will be rewarded handsomely considering positioning has become so deeply over-stretched that the snap-back will prove particularly sharp and painful. In the meantime, there seems little recourse but to wait.
EUR/USD: Stock Markets Back as Top Driver of Price Action
Sentiment trends are back in focus, with the Euro once again tracking closely with the MSCI World Stock Index. The economic calendar doesn’t come into the picture until Friday, with a hefty dollop of data including Consumer Price Index and Unemployment figures due to cross the wires. On balance, an inflation reading expected at a 29-month high of 2.7 percent is likely to take top billing, underpinning the recent build in rate hike expectations reflecting rising bets on another 25bps increase in benchmark borrowing costs in May. Lingering sovereign risk fears – with a looming Greek default at the forefront – offer a counterbalance to tightening expectations after an average of periphery “PIIIGS” 5-year CDS rates, a crude measure of the likelihood of a blow-up in any of the now-familiar problem member states, hitting a record high last week.
Technical Forecast: EUR/USD
GBP/USD: UK GDP on Tap But Sentiment Trends Hold Sway
As with the Euro, sentiment trends have overcome the interest rate outlook as the top driver of Sterling price action. On the data front, first-quarter Gross Domestic Product figures headline the docket, with expectations calling for output to add 0.5 percent having unexpectedly slumped in the three months through December 2009. Headwinds from a weak construction sector had been instrumental in that disappointing reading but PMI figures collected through March point to a vigorous rebound in home building through the first quarter, hinting a strong performance on the headline GDP reading is quite possible. This may breathe new life into Bank of England rate hike expectations, which have slumped precipitously over recent weeks to now find themselves now lowest in nearly four months, and take the UK unit along for the ride.
Technical Forecast: GBP/USD
USD/JPY: Treasury Yields Link Keeps Focus on US Calendar
The Japanese Yen has once again started to deviate from its relationship with risk sentiment, re-coupling with the outlook for US interest rates.The relationship makes sense considering both the Yen and the greenback are at this point stand-by funding vehicles for carry trades. While benchmark Japanese interest rates are surely not going anywhere for the foreseeable future, those of the US will eventually rise as the Federal Reserve unwinds stimulus and the fiscal debt burden puts upward pressure on borrowing costs. This makes US rates the barometer investors look at to gauge whether to fund yield-seeking carry positions with short-JPY or short-USD exposure, making them critical for the trajectory of the Japanese unit. Needless to say, this puts the onus squarely on the FOMC rate decision as well as the Treasury debt auctions discussed above. Japan’s own interest rate decision is likely to reinforce its perennially dovish posture, with rumors of further easing swirling ahead of the BOJ policy announcement. Consumer Price Index and Industrial Production figures are also on tap.
Technical Forecast: USD/JPY
USD/CAD, AUD/USD, NZD/USD: Comm Dollars Still Tied to Risk Appetite
The commodity bloc continues to track global stock performance, leaving sentiment trends to guide directional momentum. Australian Consumer Price Index and Canadian GDP figures as well as an interest rate decision from the Reserve Bank of New Zealand headline scheduled event risk. On balance, only the Canadian bit of these reports promises to be significantly market-moving, with growth expected to have stalled in February, yielding the weakest print in five months. Still more disturbing for Loonie bulls, the annual growth rate is expected to hit 3.1 percent, the lowest in 11 months, promising to weigh heavily on heretofore resilient BOC rate hike expectations. Meanwhile, an uptick in Australia’s yearly inflation rate is still pegged to keep price growth capped under June’s swing high at 3.1 percent, hinting the outcome won’t translate into a meaningful re-evaluation of the outlook for RBA policy, while the RBNZ is widely tipped to remain on hold having cut rates by a hefty 50bps last month.
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