US Dollar Weathers Durable Goods, Activity Reports as 4Q GDP Reading Looms

US Dollar Weathers Durable Goods, Activity Reports as 4Q GDP Reading Looms
It was a busy day for the US dollar. In the very early hours of the Asian session, the dollar would surge higher and subsequently forge new six-month highs against the euro. However this temporary drive would not establish much in the way of momentum as the market quickly retraced much of the gains. So, while the dollar was able to push higher on a trade-weighted basis; many of the majors are still presenting serious technical resistance that will likely require a definitive catalyst to establish the next leg of the greenback’s progression – whether that is bullish or bearish remains to be seen. Looking for such a driver, we can group the potential fundamental stimulants into two categories: underlying risk appetite trends and distinctive event risk. Lucky for FX traders, both are viable threats to stability over the final 24 hours of the trading week.

As for Thursday, the dollar’s bearings were found almost uniformly through the whiles of investor sentiment. Benchmark equity indexes were in the red for most of day – driven by various disappointing indicators and announcements. Weighing particularly heavy for the dollar and other US assets were the holdover effects of yesterday’s FOMC rate decision and US President Obama’s State of the Union address. The dissention from Board Member Hoenig over the language “extended period” when describing how long the benchmark lending rate would be held at its extraordinary low level suggests the conditions are to the point where debate over interest rate hikes is upon us. Furthermore, hard dates on the expiration of the various liquidity programs (mortgage-backed securities purchases end in March, currency swap lines will close Monday, etc) offer clear steps towards a more hawkish policy regime. In fact, from yesterday, the forecast for interest rates 12 months out have jumped from 68 to 78 basis points worth of tightening according to Credit Suisse overnight index swaps. As for the presidential address, remarks that the administration was not looking to “punish” banks and offering general time tables for addressing the nation’s record budget deficit provided a modest boost to the currency’s appeal.

Through the active US session, however, this fundamental good will was dampened by less than impressive data. The big ticket item for the day was the Durable Goods Orders report for December. The 0.3 percent increase fell far short of the 2.0 percent forecast; and the ex Transportation figure modestly outpacing its consensus with a 0.9 percent pickup offer little consolation. Digging into the data though, shipments of non-defense capital goods excluding aircraft (used in GDP calculations) rose 2.2 percent for the biggest gain since February of 2007. Furthermore, bookings for this category (which is considered a gauge for future business spending) rose 1.3 percent. The other readings for the session were less enticing. The Chicago Fed’s National Activity Index dropped to -0.61 (a reading below zero indicates below-trend-growth and dissipating inflation pressures) in December with the bulk of the decline coming from consumer spending and housing. And, as for the weekly unemployment benefit claims, both initial and continuing claims were higher than expected (though the latter hit a new one-year low).

Looking ahead to tomorrow, the potential for volatility is palpable. The advanced reading of US 4Q GDP was top event risk heading into the week; and anticipation has only grown with releases of Chinese and UK growth readings. And yet, the implications this event holds for the dollar and general investor sentiment creates ambiguity as to how the greenback will responds. Will the currency act out its safe haven role or will the fundamental value of an aggressive recovery win out. When push comes to shove, risk appetite will win out with notable surprises. Finally, not to be overlooked, the Fed’s Kohn will be speaking at an FDIC conference on interest rate risk. This could clue in an interest rate schedule.

Related: Discuss the US Dollar in the DailyFX Forum, Watch the 4Q GDP Release Live!

British Pound Succumbs to a Sharp Reversal after S&P Downgrades Nation’s Banks
Though the British pound doesn’t maintain an especially notable correlation to underlying risk trends and the economic docket was relatively light; the currency would nonetheless see the most volatility amongst its major counterparts through Thursday’s session. Through the day, it was reported that the British government planned on raising capital by selling it 71.5 billion pound stake in Royal Bank of Scotland, Llyods and Northern Rock. This is a natural step for a government that has turned the corner and is looking to work down its burgeoning deficits; but considering the economy and financial system are still struggling to find stability, it is seen as a political move rather than the right move for the markets. Realistically, however, selling off such a large stake will take years. In related (and more market-moving) news, Standard & Poor’s announced UK banks was no longer considered to be among the worlds’ the “most stable and low-risk.” This is a particularly harsh blow considering the influence the financial sector has on the United Kingdom’s economy.

Euro Direction Blurred by Drop in German Employment, Rise in European Confidence
Mixed data and an intraday swing for the US dollar would make for an active day for the euro. On the docket, the German labor figures held greater clout. According to the Bundesbank, the number of unemployed rose by 6,000 in January a figure that helped lift the unemployment rate up to 8.2 percent. In contrast, the Euro Zone confidence surveys extended their recovery trends. Consumer confidence boasted a 19-month high and business sentiment notched its own 15-month high. Along with the 10th consecutive improvement in the economic forecast, this data is certainly supportive of a recovery. Another fundamental note not to be overlooked was ECB member Mersch’s comments this morning that he expected to discuss the central banks next policy steps in March. This diminishes any probability that the group would hint at hikes next week.

Japanese Yen Takes its Cues from Risk Trends and Key Event Risk
When sentiment trends start to rise, the Japanese yen has been quick to respond. With each prominent swing in risk appetite or aversion, this currency’s funding status proves an overwhelming fundamental driver. However, through this period of capital repatriation, it is important not to overlook actual economic data. These fundamental trends will not only define out the currency responds to such exogenous drivers; but it will also define its long-term position in the carry trade. This being the case, the consumer-level inflation data is a heavy burden on this historical funding currency. A 1.7 percent annual pace of deflation weighs more heavy than the dip in the jobless rate and bump in household spending.

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