daily fundamentals

US Dollar Initially Weighed by Risk Appetite Fed by Strong, Global Manufacturing Reports

•    Australian Dollar Primed for a Breakout with the RBA Decision an Ideal Catalyst
•    British Pound Volatile Ahead of critical BoE Rate Decision Thursday
•    Euro Data Confirms Manufacturing Sector Expanded for the first time in 17 Months

US Dollar Initially Weighed by Risk Appetite Fed by Strong, Global Manufacturing Reports
The US dollar was put through its paces Monday thanks to a surge in risk appetite that seemed partly a response to the extraordinary losses from the capital markets this past Friday and partly due to a coordinated round of positive economic data. And, though the strong rally would eventually flag later in the US session, the initial rally from the benchmarks of the various asset classes offers a good feeling for how susceptible the market is to shifts in underlying sentiment. Measuring the intraday peaks, the Dow Jones Industrial Average rallied as much as 1.5 percent before pulling back; crude climbed to 2.2 percent; and gold hit a near two week high after advancing 2.1 percent. For the dollar’s part, the impact was felt; but the currency (on a trade-weighted basis) would not pullback far from the five-month trend that represents the backbone of the dominant, bear trend. What is certain, the dollar (like most other markets) has turned to congestion these past few weeks amid still extraordinary levels of volatility. These conditions cannot hold up for very long; and we have plenty of high-level event risk through the rest of this week to force a breakout.

For the dollar, the winds of risk appetite began to pick up in the rollover from Asian to European sessions and liquidity. A common theme was borne out of economic releases from key regions of the world starting with the release of the Chinese manufacturing PMI survey for October. According to the data report run by HSBC, the factor sector for the region’s largest economy grew at its fastest pace in 18 months. This would be followed by positive readings (though not all beating expectations) from Australia, the UK, the Euro Zone, Switzerland and finally the US. The ISM Manufacturing report was arguably top event risk this morning and the better than expected reading of 55.7 helped amplify an early morning rally for US equities and weigh on the dollar that much more. Altogether, the primary takeaway from this round of data was that the global economy is indeed climbing out recession. However, there is still doubt among policy officials, economists and now speculators as to how surefooted and prevalent a recovery will be. For the US factory activity report, the most recent reading was the strongest since April of 2006. The production gauge hit its highest levels since July of 2004 while employment hit a 43 month high; but with inventories hitting a five year low and new orders stumbling, there are questions as to how much this data’s strength is founded on restocking rather than end-user demand.

Other indicators crossing the wires this morning included construction spending and pending home sales for September. These are somewhat lagging – but nonetheless notable – gauges for the health of the housing sector. Following a negative revision to the previous month’s reading, the spending report marked its second and strongest advance for the past year. Mimicking the surge in existing home sales reported two weeks ago, the broadest NAR sales reading grew an eighth straight month. Looking ahead to tomorrow, there are very few notable economic indicators due from the US docket. Therefore, dollar traders will have to look beyond the easy (and often misleading) list of economic data for fundamental guidance. A speculative debate may grow out of the conflicting signals offered by President Obama’s warnings that it was time be “get serious” on working down government debt and Commerce Secretary Gary Locke’s comments (which a spokesman later called “imprecise”) that the president’s economic advisers were mulling over a second stimulus. And, then there is always the potential influence of the RBA’s rate decision.

Australian Dollar Primed for a Breakout with the RBA Decision an Ideal Catalyst
In an otherwise, empty economic docket; the Reserve Bank of Australia’s (RBA) rate decision in the forthcoming Asian session holds the potential for volatility – and not just for the Australian dollar. With investor optimism and positioning already running well beyond the support of true fundamentals; there is a desperate need for data or policy actions to fuel risk appetite. The RBA has taken up the bulls’ cause by becoming the first industrialized nation to pursue a hawkish policy stance. And, this is not just a slow pace of tightening to test the waters; officials’ commentary suggests the bank is looking at a consistently hawkish pace that would be akin to snuffing out rampant inflation. Today’s monthly TD inflation report noted sedate price pressures through October with a 1.2 percent annual rate of growth (the slowest on record) and last week’s 3Q report of the most tame reading in a decade; but the market is undeterred. Overnight index swaps from Credit Suisse are pricing in a 119 percent chance of a 25bps rate hike (more than 100 percent suggests there is a potential for a 50bps hike). Perhaps Australian Treasurer Wayne Swan’s upgrade to growth for the fiscal year ending June 2010 to 1.5 percent expansion from 0.5 percent projected some months ago has helped offset the data’s influence. As for impact, if the RBA maintains or redoubles its hawkish efforts, it would be a reference point for all those hawkish members of other central banks who are still being outvoted by cautious majorities.

British Pound Volatile Ahead of critical BoE Rate Decision Thursday
The British pound was jostled about Monday as economic data bowed to the currency’s unwanted correlation to risk appetite. In fact, the UK indicators fundamental traders had to work with today (though not considered particularly market-moving) were otherwise supportive of the eventual recovery of Europe’s second largest economy. The Hometrack Housing survey for October reported home prices grew for a third month – the most impressive trend since before the financial crisis struck. More remarkable was the CIPS/Markit Manufacturing PMI survey for the same period. The battered factory sector grew at its fastest pace in nearly two years. Considering this data is coming just a few days before a critical BoE rate decision, this data will be folded into speculation that policy officials will hold off on expanding their bond purchasing program and the MPC’s economic and inflation forecasts will perhaps hold a brighter outlook than traders are currently accounting for.

Euro Data Confirms Manufacturing Sector Expanded for the first time in 17 Months
For the immediate future, it looks like the euro will act out its role as the primary counterpart of the US dollar (when risk appetite rises and the dollar tumbles, the euro is the primary source of the wayward capital due its liquidity; and visa versa), or at least until Thursday’s ECB rate decision. However, in the interim, it will be important to take note of the bearings of fundamental data that happens to hit the ticker. Today, the second and final readings for the manufacturing PMI numbers for October confirmed the first growth from the sector since April of last year. Perhaps a little more influential heading into the upcoming rate decision will be tomorrow’s growth forecasts from the European Commission.


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Written by: John Kicklighter, Currency Strategist for DailyFX.com
E-mail: jkicklighter@dailyfx.com

DailyFX provides forex news on the economic reports and political events that influence the currency market.
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