Major Currencies vs. US Dollar (% change)
02Aug 2010 – 06Aug 2010
General Comment:
Risk sentiment remains the dominant driver of currency market price action but the path of least resistance is unclear after last week’s US employment figures produced mixed results, offering little clarity about investors’ assessment of the health of the world’s largest consumer market and, by extension, the continuity of the global recovery. Curiously, the greenback sold off along with stock markets, with traders seemingly more in tune with the disappointing headline figure’s implications for monetary policy rather than the US currency’s safe-haven profile. Stranger still, shares went on to erase most of their initial decline after the Private Payrolls figure printed much closer to expectations than the census-distorted Nonfarm Payrolls outcome, but the greenback remained under pressure and retraced less than half of the initial spike lower.
Looking ahead, a busy week of US economic releases promises to offer greater insight on the trajectory of risky assets. Needless to say, the most important of these will be the Federal Reserve’s interest rate announcement. While markets are unequivocally pricing in no chance of a change in benchmark borrowing costs, traders will doubtless pay close attention to the language of the statement and any clues this offers on where things go from here. On balance, a dovish lean seems likely considering strong evidence that the US economy will slow in the second half of the year. However, with America being seen as the last viable engine of global growth, the outcome may prove supportive for the Dollar amid a return to widespread risk aversion. Indeed, Europe has been sidelined as it deals with its hefty debt burden, Japan remains mired in deflation, and China is willfully pulling on the brakes, spooked by fears of asset bubbles and runaway inflation. Alternatively, an extension of Friday’s dynamics may see USD come under renewed selling pressure as withering rate hike expectations supersede the US currency’s safe-haven allure.
EURUSD:
The correlation between the Euro and the MSCI World Stock Index has firmed from last week, hinting the single currency will follow the ups and downs of Wall Street as investors attempt to gain their bearings on where risk appetite goes from here. Friday’s preliminary second-quarter Gross Domestic Product figures for Germany and the Euro Zone as a whole headline the domestic economic calendar, with expectations calling for annual growth rates to have nearly doubled in the three months through June. The correlation between spot and the short-term EZ-US yield spread is not significant at present however, hinting that any the European unit may not win much support from outcome unless it proves to buoy overall risk appetite, an outcome that seems unlikely considering the temporary nature of the upswing in growth as the currency bloc begins to be weighed down by a lurch toward austerity.
Source: Bloomberg
GBPUSD:
Monetary policy expectations will vie with risk sentiment for dominance over British Pound price action, with GBPUSD once again showing a strong correlation to the MSCI World Stock Index. The Bank of England’s release of an updated Quarterly Inflation Report, which this time aroundwill take into account the government’s ambitious austerity budget that aims to trim the public deficit by a hefty 6.3 percent of GDP by 2014-15, takes the spotlight on the domestic economic calendar. Mervyn King and company remained mum once again following last week’s rate decision, leaving traders still eager to size up the central bank’s take on the plan’s implications for economic growth and monetary policy going forward.Government spending has been a key driver of the UK recovery, hinting that the significant retrenchment on the fiscal side will call for monetary policy to (at least) remain at the current, accommodative setting for the time being to prevent a slide back into recession. In fact, a convincing argument can be made for further easing despite stubbornly high CPI inflation as temporary upward pressures including a weaker sterling filter out of the equation.
Source: Bloomberg
USDJPY:
Prices continue tracking closely with 5-yearUS Treasury yields. This puts the onus on US economic data – most notably the Fed rate decision – once again indirectly aligning the pair with risk appetite as overall confidence and the rates outlook seemingly continue to hinge on the same set of near-term developments. A busy issuance calendar is also of note, with the Treasury set to auction off $74 billion in new debt spread across 3-year, 10-year and 30-year maturities. The Bank of Japan monetary policy meeting may attract more attention than usual considering the Yen’s recent strength has prompted some fighting words from policymakers, with the specter of intervention returning once again. Indeed, Finance Minister Yoshihiko Noda said early Monday that “disorderly” movements in exchange rates were “undesirable”, adding that policymakers need to “pay closer attention” to the Japanese currency’s level.
Source: Bloomberg
USDCAD, AUDUSD, NZDUSD:
The commodity bloc remains closely tied to risk sentiment, althoughcorrelationreadings between prices and the MSCI World Stock Indexhave edged lower from last week (CAD: 0.72, AUD: 0.77 and NZD: 0.81) after unexpectedly soft economic data weighed on rate hike expectations for all three currencies.Australian Employment, New Zealand Retail Sales, and Canadian Housing Starts headline domestic scheduled event risk. On balance, the Loonie and Kiwi appear most vulnerable to data-linked volatility considering their still-high tightening outlook readings for the coming year relative to most of the G10, whereas the Aussie promises to be a more straight-forward bet on risk appetite after traders wrote off further tightening late last month.
Source: Bloomberg
Source: Bloomberg
Source: Bloomberg
For real time news and analysis, please visit http://www.dailyfx.com/real_time_news
To receive future articles by email, please contact Ilya at ispivak@dailyfx.com
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.
