Dollar Avoids a Trend Once Again after Retracing Risk Aversion Gains

Dollar Avoids a Trend Once Again after Retracing Risk Aversion Gains
Through Tuesday’s Asian and European trading hours, the US dollar was set into a moderate bull trend that was facilitated by a distinct rise in uncertainty and the resultant flight-to-safety flows. Yet, as has been the case with most tentative trend developments over the past few weeks, this promising advance would inevitably retrace much of its gains and keep the greenback anchored to its self-imposed range. Indeed, an objective view of the single currency itself - by way of the dollar index - reveals that the unit has made no progress in a little over a month. This is partially a consequence of tempered interest rate expectations and leveled growth expectations; but considering the currency’s distinct fundamental and speculative connections to risk appetite trends over the past year-and-a-half, this dominant theme is as influential in its stability as it is through trend. For short-term speculative manipulation this morning, most of the activity would come through the European hours. Taxing the provisional confidence behind the situation in Greece, both ECB policy maker Weber and EU head Barroso voiced doubts about the efficacy of a European Monetary Fund. Considering this is essentially the best backup plan authorities have been able to muster since panic struck the region, these remarks suggest this threat to financial stability is subsisting on speculators’ good will alone. Another wave of concern would come from the UK, the timeliest source of uncertainty. Warnings from two ratings agency raised the specter of downgrades for British banks the economy itself. However, just like China’s announcement that it would nullify local government loan guarantees; these events would fail to rouse the imagination and fears of the speculative crowd. Though, with each incident, the probability of a break grows.

Turning from speculation to fundamental interests, the economic docket would carry a couple secondary economic indicators and press meeting with Fed Board Member Charles Evans. For scheduled event risk, the National Federation of Independent Business’ small business sentiment index fell unexpectedly in its February reading. The headline reading matched its lowest reading in seven months and the expectations component that projects conditions over the coming six months hit its worst level since March. Looking at the reports details, there was a notable easing in the pace of job cuts (small business account for a large majority of American jobs); but “poor sales” stood as the top concern, the outlook for demand dropped to a zero reading and investment expectations were similarly mixed. From a market-moving perspective, this data promises little. On the other hand, as a gauge of fundamental health, this indicator has a scope similar to the ISM surveys. With a similar outcome, the IBD/TIPP Economic Optimism poll itself fell to a year low with a March reading of 45.4. In comparison to the economic data, Chicago Fed President Evans’ commentary carried a little more weight. Notably more dovish than some of his colleagues, Evans said he was worried that unemployment may tick higher and he was “wary” of engaging in asset sales too early. Furthermore, he added to his time frame for rate hike in suggesting the benchmark should be held low for “three or four meetings,” though he did echo a belief that interest on reserves would be an effective measure in the near-term.

Related: Discuss the US Dollar in the DailyFX Forum, US Dollar Weathers a Rebound in Risk Appetite, But for How Long?

Euro Stumbles as Policy Officials Voice Their Doubts over Greece and an EMF Solution
Fundamental traders were likely expecting little from the euro Tuesday as the economic docket was void of notable economic releases. However, commentary from a number of key sources would more than make up for this lack. Drawing the focus back on the solvency and stability of the Greek economy, a European Union draft assessment warned that the tax hikes the nation announced yesterday could fail to raise additional revenues for the country. This is not an unlikely scenario given the crippling effect such austerity cuts will no doubt have on demand itself. Adding fuel to the fire, EU Commission President Jose Barroso remarked that the proposed European Monetary Fund could not correct Greece’s “urgent issues[s].” With similar reproach ECB member Axel Weber said that the EMF was a distraction. Both men are concerned that an institutionalized relief fund would take considerable time to get off the ground and it would not ultimately solve the record deficits member nations have run. Further commenting on his own charge, Weber would also offer a discouraging outlook for German growth. Referring to the severe weather through the opening months of this year, he warned Europe’s largest economy could stall or slightly contract in the first quarter.

Related: Discuss the Euro in the DailyFX Forum, Euro at Impasse versus US Dollar: Further Losses or Sharp Bounce?

British Pound Hit by Data and Credit Rating Warnings
The British pound has maintained the most active economic background so far this week. Early in the Asian session, the docket would release both the BRC Retail Sales Monitor and RICS House Price Balance for February. Supplementing these reports through the regular London hours, the visible trade balance for January would keep the disappointing trend going. Against an expected contract, the deficit actually grew to a 17-month high 7.987 billion pounds. An immediate breakdown of the headline figure shows that exports dropped to its lowest level since July 2006 with particularly large declines in demand for chemicals and commodities. This took some economists for surprise given the general depreciation of the sterling over the past three months. This data aside, the real concern for the UK is the nation’s credit health. To this effect, Fitch’s warning the government wasn’t adjusting “too slowly” set the focus back on shaky confidence in sovereign debt ratings. On the other hand, Moody’s warning that British banks and lenders could be downgraded as the government withdrawals support is perhaps more pressing.

Related: Discuss the British Pound in the DailyFX Forum, British Pound May Consolidate After Falling to 10-Month Low

Japanese Yen Benefits from Carry Unwinding and Strong Signs of Economic Recovery
There is little going for the Japanese yen on the interest rate front nor from risk appetite trends; but the economic background has improved modestly with economic data release early in Tuesday’s session. Perhaps the most bombastic reading was the 217.3 percent surge in the preliminary reading of February machine tool orders. This is a notable gauge of investment activity but also stimulus money at work. Alternatively, the rise in the Leading Index is more promising for growth. A 10th consecutive rise marks the longest series since July 2007.

Related: Discuss the Japanese Yen in the DailyFX Forum, Japanese Yen at Risk On Risk Appetite and Expected Monetary Easing

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