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Dollar Forestalls a Reversal as US NFPs Holds the Last Opportunity for Volatility this Week

Dollar Forestalls a Reversal as US NFPs Holds the Last Opportunity for Volatility this Week

2010-03-05 00:46:00
John Kicklighter, Chief Currency Strategist
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Dollar Forestalls a Reversal as US NFPs Holds the Last Opportunity for Volatility this Week
A day after the US dollar dipped to its lowest level in two weeks, the currency has easily recovered its lost ground. Given the moderation in equities and commodities, the markets as a whole are defined by a sense of indecision. While there is still a bias behind the capital markets, it is a trend that lacks the momentum that defines a true trend and stance on holding speculative positions. For this reason, the dollar is perhaps the better gauge of speculative tentativeness with a lack of trend to compliment restrained volatility. To color risk appetites Thursday, investors were tuned into the European and UK monetary policy meetings as well as a few notable updates on Greece’s financial struggles. The focus wasn’t on the individual events, but the general implications these incidents have on the perception of global sovereign debt risk and the effort to withdrawal government stimulus. The rate decisions would offer little to alter the perception of a slow tightening of the collective belt. And, as for Greece, the nation executed a successful government bond sale and officials called on the EU to reveal the details on any aid the group plans to allot to the member should it be needed. These are promising steps; but their full effect cannot be assessed until risk appetites are strained and investors have to evaluate their confidence in a stable system.

Turning to the fundamental health of the US economy, today’s scheduled event risk was positive net positive. The only disappointment among the notable readings coming down the pipeline was January’s pending home sales figure. Following the discouraging readings for the existing and new unit sales before it, this broadest indicator for activity in the housing market slipped unexpectedly by 7.6 percent. This is yet another sign that the government’s extension of the housing tax credit may not be enough to compensate for demand that is weakened by structurally high unemployment. Following up on the durable goods report released last week, the factory orders report grew for a fifth consecutive month by 1.7 percent. Although, excluding transportation orders, activity only rose 0.1 percent. For consumer spending – the life-blood of the US economy – the ICSC chain store sales report accelerated to a 3.7 percent annual clip, the fastest pace of growth since November 2008. Finally, reminding us of tomorrow’s top-tier event risk, the Department of Labor recorded a cooling in the pace of initial jobless claims to 469,000 filings. More remarkable was the drop in the continuing claims figure to its lowest level since the week ending January 2nd 2009.

Heading into the end of the week, the most important to question to ask when it comes to the February non-farm payrolls report is whether it will be a market moving event. That depends on a few factors. First, will the indicator play to US growth and interest rate expectations or will this top economic release drive speculative interests. Given the general restraint in underlying risk appetite, it would be difficult for an indicator that is showing very-gradual but steady improvement to revive convictions across various asset classes and different time zones (this data is being released on a Friday). Contributing to the outlook for growth and monetary policy would be more straightforward. The forecast for rate hikes over the coming 12 months is calling for a little more than 50 bps worth of tightening. That is the most dovish forecast since December 2nd. Therefore, a particularly strong or weak jobs figure could markedly alter depressed expectations. This introduces another aspect of the data needed for volatility: surprise quotient. The Bloomberg consensus calls for a 65,000 job loss and an uptick in the unemployment rate to 9.8 percent. This figure is expected to be influenced by the winter storms during the month, so forecasts can be way off the market.

Related: Discuss the US Dollar in the DailyFX Forum, Watch the NFPs Release and its Impact on the Dollar Live!

Euro Finds Little Confidence from the ECB’s Policy Decision, Greece’s Progress
For fundamental commotion, the euro was the most activity currency for the day. Yet, the scheduled and exogenous event risk that would cross the wires leveraged little strength for the currency. The most meaningful incident through the session was not the ECB rate decision or the GDP revision; but the actions of the Greek government. The economy seized the opportunity that recently calmed markets and the confidence derived from Wednesday’s additional deficit cuts provided to finally go forward with the 5 billion euro, 10-year bond officials have held back on now for some time. With a bid nearly three times the official offering, the market voted its confidence in the economy’s stability. However, considering the yield demand for the bond was 6.35 percent (more than three percentage points of the German issue of the same maturity), optimism was somewhat restrained. Another interesting development was the call from Greek Finance Minister Papaconstantinou for EU officials to reveal the details for any bailout plan the group it is preparing should the member need it. As the policymaker suggests, this would likely temper uncertainty; but this announcement was also likely a rebuke for the intensified pressure heaped on the nation. For the day’s other notable releases, the ECB rate decision would pass without alteration to the benchmark 1.00 percent rate. On the other hand, President Trichet was vocal in his dismissal of the notion that the central bank should raise its inflation target to 4.0 percent and that Greece should consider an IMF loan. He would also announce that three-month cash offers would switch over to a variable rate – another small step to tighten.

Pound Break Unnerved by a Lack of Action, Commentary from the Bank of England
Given the dramatic decline in the pound over the past two weeks and the intensified concern surrounding the nation’s deficit as well as the trouble the upcoming election could leverage; investors were expecting something from the conclusion of the Bank of England’s policy decision. The decision to maintain the benchmark lending rate at 0.50 percent was fully expected; and the untouched 200 billion pound purchasing program telegraphed their intention to keep to their wait-and-see approach as previous shifts in policy filtered through. However, the lack of commentary was perhaps a little unnerving. While it is not unusual for the bank to not release a statement during normal circumstances, recent events and future threats somewhat warrants at least an outlook of optimism and reassurance of steadfastness from the MPC.

Canadian Dollar Advances on Strong Business Activity Read, Hawkish Rate Forecasts
The Canadian dollar has been proven itself to be one of the strongest currencies among its liquid counterparts – a considerable feat considering it has only a moderate tie to underlying risk trends (themselves having been sterilized). The loonie’s strength has developed through investors’ search for a currency that is both stable and has potential for return. With a 12-month interest rate forecast calling for 101 points of tightening (only behind the RBA and RBNZ) and an rise in the Ivey business activity report today, both considerations are confirmed.

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

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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