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Dollar Attempts to forge a New 8-Month High but Risk Trends Wouldn’t Follow Through

Dollar Attempts to forge a New 8-Month High but Risk Trends Wouldn’t Follow Through

2010-02-25 23:49:00
John Kicklighter, Chief Currency Strategist

Dollar Attempts to forge a New 8-Month High but Risk Trends Wouldn’t Follow Through
Through the Asian and European sessions, the pressure on risk appetite was palpable. A distinct correlation between equities, commodities and currencies offered a clear sign that a primary fundamental driver was once again in control of the market: investor sentiment. However, depending on which session close participants referred to; the assessment for the day can be very different. Through the London close, the demand for stability and the move to liquidate risky positions was still on pace. Through this period, the Dollar Index was climbing higher; but the currency was still short of setting a new eight-month high. Fast-forward to the close of the New York trading hours and the dollar was actually in the red and the range for the day would define a session that was perhaps far more reserved than what was carved out in other asset classes. This divergence in momentum is remarkable, because it suggests volatility was naturally tempered by speculative interests. Just as the dollar was unable to take the next step to revive its month-long bull trend, the Dow Jones Industrial Average wouldn’t come close to reestablishing the bear wave that has tentatively developed in January. In reality, this false dawn for the bearish crowd isn’t anything new. This has generally been the pace of things for the past week. In fact, the terrain for risk wasn’t particularly rough today. The only headline that would carry the necessary weight to significantly alter underlying sentiment was the warning from Moody’s that it may downgrade Greece’s credit rating. However, this is not a new threat and the market has weathered this specific concern for some time now.

Going forward, sentiment trends will likely keep the reins on the dollar; but changes in the currency’s fundamental backdrop can slowly alter its relationship to this unpredictable and potent driver. From the docket today, the consensus was one that would nullify some of the favor the greenback has been able to acquire over the past few weeks. Top, scheduled event risk this morning was the durable goods orders report for January. While the 3.0 percent increase in the headline reading would seem a bullish takeaway, the details would leave traders with a far different assessment. Excluding volatile transportation orders, the indicator actually reported its largest decline in five months with a 0.5 percent contraction. Furthermore, the figure for non-defense capital goods excluding aircraft (a sign of future investment) unexpectedly dropped 2.9 percent. Another notable release was the Federal Housing Finance Agency’s housing price data for December and the fourth quarter. The 1.6 percent drop on the month was the largest in 13 months, and a 0.1 percent dip in the quarterly reading followed the first positive reading since 2007. Taken with the record low in new home sales yesterday, it looks like a vital component of growth may not contribute to a recovery.

Looking to the final 24-hours of trading this week, there are notable indicators scheduled for release; though, this is a low probability that they can tap into the most element trend (investor sentiment) to truly establish a new trend. Though it is a revision number, the fourth quarter GDP data could clarify the United States’ standings in the global recovery scheme. When establishing forecasts for interest rate (and thereby speculating on expected returns), growth is a leading and contributory gauge. The headline figure is projected to mark little change, but notable changes in key component data (personal consumption, government spending, capital investment, etc) can easily change things.

Related: Discuss the US Dollar in the DailyFX Forum, Dollar Awaits a Clear Read on Risk and Rate Forecasts

Euro: Declines in Employment and Confidence Data Adds Weight to Greece Anxieties
Considering the concerning data and headlines to come out of the Euro Zone Thursday, the euro perhaps deserved to suffer the same fate as the British pound. German labor data delivered the first bearish jolt by reporting the second consecutive increase in the number of unemployment through February. Yet, the impact this particular release could have had was offset somewhat as the pickup was less than expected – not to mention the jobless rate was effectively unchanged (the previous reading was revised down). Less ambiguous was the disappointing turn from the sentiment data from the European Commission. Both the economic and consumer health measures fell for the first time in 11 months. The saving grace on the calendar was probably overlooked. The ECB release the money supply (M3) report for January; and the 0.1 percent annual increase through that period marked the first improvement in trend since April of 2008 from the first contraction in the series’ history. This has considerable implications for the central bank as President Trichet often refers to this measure when discussing inflation pressures. Beyond the docket, the true fundamental event was Moody’s decision to join Standard & Poor’s to warn of a possible downgrade on Greece’s credit rating. There are those that contend the Moody’s rating is the last legitimate backstop for the country’s ability to raise vital capital to support the economy. The situation in the Euro Zone is certainly heating up.

Related: Discuss the Euro in the DailyFX Forum, Can Inflation Data Salvage Fading ECB Rate Forecasts and Boost the Euro?

Pound Plunges though the Catalyst and Response Seem Disproportionate
The British pound was the biggest loser for the day – though fundamental updates wouldn’t provide a clear case for why the sterling should have been particularly weak today. Looking at the calendar, only the total business investment reading for the fourth quarter was remarkable. Reflecting the lame health of the economy, a 5.8 percent contraction in capital expenditures the period was well below forecasts and extended the component of growth to its longest series of contractions since 1981; but this is hardly a surprise. Commentary from the BoE was similarly unremarkable. Perhaps the dismal outlook for deficits, elections and recovery simply met its breaking point. Time and trend will tell.

Related: Discuss the British Pound in the DailyFX Forum, Sentiment Data Signals further Losses for GBPUSD

Japanese Yen May Struggle to Keep its Favorable Risk Bearing as Data Flow Begins
Without doubt, the yen’s position as a funding currency is its primary source of volatility and trend by linking the Japanese unit to sentiment trends. However, the there are limits to the capital behind an unwinding of carry flows; and it is fundamentals that will decide trend over the long-term. And, when carry repatriation runs dry, there looks to be little appeal for this currency as a safe haven. Through Friday, we will see a dense reading on economic health. Factory activity and retail sales will gauge growth, while CPI figures will measure the impact of deflation.

Related: Discuss the Japanese Yen in the DailyFX Forum, Watch the Dense Round of Japanese Event Risk and its Impact Live

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

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