FOREX TREND MONITOR: Dollar Suffers Setback as FOMC Minutes Approach
Major Currencies vs. US Dollar (% change)
09 May 2011 – 13 May 2011
Dollar Suffers Setback as FOMC Minutes Approach
The US Dollar has come under pressure having rallied decisively over the past two weeks while stocks, key commodities (including gold and crude oil), and higher-yielding major currencies advanced. On balance, the reversal likely owes to little more than a corrective retracement after risky assets suffered heavy losses the preceding two weeks – which also saw the greenback mount a decisive rally to add a hefty 3.8 percent – with the larger bearish theme centered around the unwinding of bets dependent on cheap QE2 funding ahead of the program’s June expiry running into short-term bargain hunters.
Needless to say, markets don’t move in straight lines and some fits and starts were to be expected as the emerging risk-averse trend took hold. Given the preceding selloff’s focus on the end of QE2, it seems only natural that traders would pare some of the exposure accumulated over the past two weeks as the Federal Reserve prepares to release minutes from the policy meeting where the program’s expiration date was set in stone. With that in mind, the publication is unlikely to be a game-changer.
Indeed, Ben Bernanke’s inaugural quarterly press conference in Aprilhas already introduced the major points of interest: Fed will allow QE2 to expire in June; proceeds from maturing securities will continue to be reinvested; and rate hikes may be undertaken while unemployment remains high if inflation expectations become unhinged. This means much of what is to be unveiled is already well-known, limiting the report’s market-moving potential and opening the door for risky assets to resume their downward trajectory.
The trading week began with intense focus on the EU finance ministers’ summit in Brussels, but the sit-down produced few headlines. The issue of potential restructuring in Greece remains largely unresolved until a team from the regional bloc currently on the ground there delivers its findings. Meanwhile, the approval of a bailout for Portugal seems hardly a game-changer considering it must now be approved by the country’s deeply divided government, which is no small feat considering it is tied to austerity measures that previously brought down the administration of Prime Minister Jose Socrates just two months ago.
On balance, the overall sovereign debt landscape in the Euro area remains largely unchanged from where it was before the sit-down. This puts risk sentiment back at the forefront, with the single currency having some room to recover as the spectrum of risky assets digests recent losses, but ultimately pointing the way to further downside as the looming expiry QE2 remains a central theme for the weeks ahead. May’s Consumer Confidence reading amounts to the only bit of significant event risk left on the docket, with expectations calling for the lowest print in 10 months.
GBP/USD: Sentiment in Focus on Static Bank of England Outlook
Minutes from May’s Bank of England policy meeting revealed another 6-3 vote in favor of keeping rates on hold. The seemingly static outcome actually amounts to a setback for the hawks considering their most prominent advocate – Andrew Sentence – will be replaced by the far more moderate Ben Broadbent beginning in June. Separately, jobless claims unexpectedly surged by the most in 10 months in April, seemingly putting the nail in the coffin of near-term interest rate hike expectations.
As with the Euro, this keeps the spotlight firmly pointed on risk sentiment trends, with prices continuing to show meaningful correlations with the MSCI World Stock Index. Likewise in line with the single currency, this opens the door for a correction along with share prices after the aggressive selloff of the previous two weeks, though the overall outlook continues to call for further weakness.
Relative borrowing costs remain in focus with USDJPY tracking the US – Japan 10-year Treasury bond yield spread. Given the markets’ focus on QE2 expiry over recent weeks, a bit of weakness here seems reasonable ahead of the FOMC meeting minutes release. With that in mind, the low likelihood of seeing anything earth-shaking from the publication suggests expectations of higher US rates after Ben Bernanke and company step into the background may start to pressure USDJPY higher into the end of the week. Dovish comments from Bank of Japan chief Maasaki Shirakawa earlier this week preceding a rate decision on Friday as well as expectations of a brutal drop-off in GDP growth in the first quarter reinforce the probability of such an outcome.
The commodity bloc remains firmly anchored to global stock markets, with a parallel rebound underway as markets digest the risk aversion witnessed over the past two weeks. As with the spectrum of sentiment-sensitive assets however, the move looks temporary, with the larger QE2 expiration driven theme likely to return to the forefront as the FOMC meeting minutes release fades from view. Canadian Consumer Price Index report and Retail Sales figures round out the week’s home-grown event risk.
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