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Dollar Ends the Week Relatively Unchanged as Traders Weigh Global Risk against NFPs

Dollar Ends the Week Relatively Unchanged as Traders Weigh Global Risk against NFPs

2010-02-27 00:52:00
John Kicklighter, Chief Currency Strategist
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Dollar Ends the Week Relatively Unchanged as Traders Weigh Global Risk against NFPs
Despite a round of data that would come off as net bullish for the outlook of the US economy, the dollar would nonetheless end the day and week in the red. Such an outcome isn’t difficult to envisage given the noncommittal sense of risk appetite amongst the speculative crowd through this period. For the greenback, the pullback was just another bound sentiment swing as the market worked off some of its volatility while not having a clear direction to apply its energy. However, it is worth mentioning that today’s pick up in risk appetite (which is what a rise in the Dow, rise in commodities and fall in the US dollar typically denotes) was far more tame than other moves this week. This restraint was best seen in the equities market, as the Dow Jones Industrial Average closed only 4 points above its open and maintained a paltry 80-point range. Nonetheless, the limited activity may have been enough to encourage a wider range of swings for the benchmark currency. While the dollar wouldn’t lose much ground against its major counterparts, EURUSD closed above a descending trend channel that has defined the pair’s decline since January 25th. With the proper fundamental and speculative leverage, this could lead to a serious retracement in the dollar’s gains this year – not an unlikely scenario considering the currency hasn’t significantly fallen against its core counterparts despite a recent upswing in capital markets.

Looking beyond the stabilizing influences of investor sentiment, the fundamental outlook for the US dollar and its economy would absorb significant event risk today. At the top of the list for big name releases was the fourth quarter GDP figure. To be clear, this wasn’t the advanced reading that offers the biggest adjustment to forecasts but rather the first revision. On the surface, the headline reading showed a slightly faster pace of growth than was originally recorded, running at a six-year high 5.9 percent clip. The more precise component data was the real interest. Personal consumption grew a softer-than-expected 1.7 percent through the quarter, though there were marked in exports and investment. In fact, purchases of equipment and software grew the most in a decade. However, looking at the real meat of these numbers, it is clear that growth is not developing in those areas that promote sustainable expansion. Breaking the GDP reading down, inventories would account for 3.9 percentage points of growth while consumer spending added just 1.2 percentage points. Going forward, domestic consumption (accounting for approximately four-fifths of the US economy) will have to contribute far more to the equation. Otherwise, the recovery will be anemic and drawn out – a likely scenario given the structural unemployment, lack of wage growth and vulnerable credit markets. The other two notable figures for the day were effectively on opposite sides of the spectrum. The existing home reading for January took on a similar hue to the new home number. Purchases unexpectedly dropped 7.2 percent (the second largest drop on record) to a seven-month low. Alternatively, the Chicago Purchasing Managers’ measure of business activity printed at 62.5 and subsequently set the best pace of growth since April of 2005.

Next week, the US docket is thick with meaningful and market-moving economic releases; but the probability that any one of these reports can encourage a trend is nonetheless low. Personal income and spending, manufacturing and service sector activity, construction spending, consumer credit and the Beige Book are all meaningful for gauging the long-term health of the US economy and its currency. However, for those seeking volatility, the real promise rests with the February non-farm payroll release. Though, after the positive November revision, it seems the reality of finding jobs for the 8-plus million Americans that lost jobs these past two years has dawned on investors.

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

Euro Regains Some Lost Ground, though the ECB and Greece will Keep the Currency Under Pressure
The euro’s health has been questionable of late; and for good reason. Through Friday’s close the single currency was able to advance against the US dollar, British pound and Japanese yen; but losses against the Australian, Canadian and New Zealand dollars suggest this was simply the influence of the risk tides. Over the past weeks and months, the unit has found itself set adrift by financial and fundamental uncertainties. The very least of the euro’s worries is the situation in Greece (not to mention Spain, Portugal, Ireland and Italy). However, beyond the implications of moral hazard or a potential secession from the Euro Zone, this burden also has implications for growth and interest rates. Severe cuts in spending to meet deficit ratios means some member economies will have drawn out recessions that will drag down the recovery of the broader European Union. Furthermore, given the drop in the core regional CPI reading today to match a record low 0.9 percent clip, there is little hawkish pressure for the ECB to worry about. Given current conditions, the Fed looks like it will hike long before its European counterpart.

Related: Discuss the Euro in the DailyFX Forum

Pound Extends its Plunge despite Positive Growth Revisions and Improved Sentiment
Selling momentum let up for the sterling Friday…but only marginally. Concerns over the nation’s swelling deficits, heavy-handed stimulus and faltering economic recovery are not particularly new; yet there is always a breaking point for investors. Clearly, the dramatic decline from the currency over the past week shows a particular fear in the coming election, an eventual downgrade of the sovereign credit rating and next week’s BoE policy decision. Traders were so anxious in fact, that they completely overlooked the unexpected improvement the GfK consumer confidence survey and the uptick in the 4Q GDP figures. Though with a 3.3 percent annual pace of contraction, what should we expected?

Related: Discuss the British Pound in the DailyFX Forum, British Pound Fails to Benefit From Enhanced 4Q GDP Report

Australian Dollar Could Extend its Lead Over its Peers with an RBA Rate Decision and 4Q GDP
The economic docket for the coming week is particularly dense; but the Australian dollar no doubt is looking at the greatest potential for event-driven price action. For most traders, the RBA rate decision is the only central bank meeting with any real potential. At its last gathering, the group unexpectedly took a wait-and-see approach with a pause. Since then, employment has surged, confidence improved and commentary has become far more hawkish. Set this against the market’s 49 percent probability of a quarter point hike; and we have the potential for surprise. 

Related: Discuss the Australian Dollar in the DailyFX Forum, Watch the RBA Rate Decision and its Impact on the Market Live!

For Real Time Forex News, visit: http://forexstream.dailyfx.com/
 
**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

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

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