daily fundamentals

US Dollar and Risk Appetite Relatively Staid Despite an Increase in Fundamental Activity

•    US Dollar and Risk Appetite Relatively Staid Despite an Increase in Fundamental Activity
•    British Pound Hit by Dim Credit Rating Outlook, BoE Quarterly Report Promises Volatility Wednesday
•    Euro Mixed as Finance Ministers’ Budget Promises offset by a Drop in Confidence Readings
•    Australian and New Zealand Dollars Take Fundamentally Divergent Paths

US Dollar and Risk Appetite Relatively Staid Despite an Increase in Fundamental Activity
A comparison between market activity today and yesterday may seem a dichotomy in logic. Monday’s session was light on economic event risk; and yet most assets were producing sizable rallies and declines. In contrast, the relatively dense backdrop of scheduled and unscheduled announcements for today was otherwise impotent. However, this contrast doesn’t necessarily break with reason. It is true that surprises from meaningful data releases can elicit an adjustment in exchange rates; but when the primary means for volatility and trend is tied up in a single driver (risk appetite), seemingly high-level indicators merely threatens short-term moves. In fact, the prospect of a sharp move founded on the economic docket can oftentimes encourage traders to square positions in an effort to avoid a countertrend move (counter to the general pace of underlying sentiment) that will ultimately fall back into line.

Looking at the fundamental swells for the dollar today; there was relatively little to bolster interest rate expectations or help to dispel the greenback’s status as a key safe haven currency (the only way other than a clear drop in risk appetite that the dollar can advance in today’s markets). However, there was plenty to help benchmark forecasts for the eventuality of the removal of stimulus in the US. The most prominent influence would come from the round of Fed Board Members offering commentary on the day. Of the five major speeches given, Atlanta Fed President Lockhart’s rhetoric was the most remarkable. The official said that the economic recovery to this point was being “supported” by government stimulus and that there were “sobering aspects of the economic picture.” Fed President Fisher would later add fuel to the fire by saying such “sources of strength” for the economy would fade into 2010. Lockhart would also offer a concern that was echoed among many of his colleagues, when he stated is concern over the health of commercial real estate and the impact it could have on financial markets. However, not all was dovish. In response to a question to timing for monetary policy, Lockhart said he could imagine scenarios where rates would be hiked while unemployment was still high.

British Pound Hit by Dim Credit Rating Outlook, BoE Quarterly Report Promises Volatility Wednesday
The British pound, while ultimately closing the session close to where it began, was one of the most active currencies for the day – and the volatility can certainly be attributed to fundamentals. The biggest surprise through the morning would not come from the round of top-tier economic releases; but from commentary from the rating agency Fitch. The authority suggested the United Kingdom was most at risk for receiving a downgrade to its sovereign debt rating. This is not the same thing as actually losing its triple A rating; but when dealing with a market where strength and weakness is relative, it would certainly contribute to the currency’s already shaky economic outlook. According to the Fitch, Europe’s second largest economy required the “largest budget adjustment.” What’s more the current stability for its rating was founded on their “expectation that the UK government will articulate a stronger fiscal consolidation program next year.” Should the government not offer the level of spending cuts that is required to work down the burgeoning deficit, the rating outlook can easily turn sour. Lest we forget, Standard & Poor’s already lowered its outlook for the economy to “negative” back in May.

From the regular economic docket, the event risk was much more straight-forward. The visible trade balance figures for September were a notable disappointment for an economy that is depending on exports and manufacturing to lead the recovery. The 7.194 billion pound short-fall was the largest in eight months; but more importantly it seems to have broke the steady recovery that has developed over the past year. The advance of the pound certainly does not help the situation. The rest of the docket would offer a more bullish tone. Both the RICS House Price Balance for October and DLCG housing inflation gauge for September would improve. The former pushed to its highest level since December of 2006 while the latter marked a 14 month high. The BRC Retail Sales Monitory for October was far and away the biggest upside surprise with a 3.8 percent jump in same store sales for the month – the largest increase since 2002.

The real fireworks however have been reserved for tomorrow. The labor data is a key gauge of the nation’s health (and is certainly capable of encouraging volatility); but the Bank of England Quarterly Inflation report can truly alter the pound’s course. Last week, the central bank decided to increase its bond purchasing program (as expected) by 25 billion pounds (less than expected) to 200 billion. Traders will want to see the reasoning behind this move and see whether they can divine the pace of policy going forward.

Euro Mixed as Finance Ministers’ Budget Promises offset by a Drop in Confidence Readings
ECB policy officials were on the wires throughout the day; but the general cut of their commentary was one that mirrored the neutral stance that the central bank has maintained for the past few months. Highlights include concerns that growth was not yet sustainable without the aid of stimulus; but all liquidity measures will not be needed in the future. This more or less sums up what central bank President Trichet has attempted to telegraph in his monthly statements and Q and A sessions. What was truly interesting was the investor sentiment reports for November. The ZEW survey for the Euro Zone was expected to climb this month to 58.0 but would instead plunge 5.1 points to 51.8. The German-specific reading would offer a similar disappointment with its Economic Sentiment figure (the outlook component). This is a notable drop as it suggests rising unemployment and the foreseeable end to stimulus is cooling investors’ expectations. Will this translate into price action?

Australian and New Zealand Dollars Take Fundamentally Divergent Paths
In an otherwise quiet session, the Australian and New Zealand dollars were quite active when set against each other. For the Australian currency’s part, economic data was taking boosting bullish sentiment. The NAB business sentiment forecasts for October to close to a six year high. Growing demand for Australia’s exports as well as a relatively stable domestic economy and financial market have clearly encouraged business leaders. This is yet another reason for RBA officials to entertain rate hikes. In contrast, RBNZ Governor Bollard is as far from hawkish as can be. The central banker attacked his currency today saying it was overvalued and its current high was unsustainable. However, his efforts to jawbone the currency lower remain ineffective.

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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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