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Dollar Unchanged on the Day as Risk Pressures Build in the Background

Dollar Unchanged on the Day as Risk Pressures Build in the Background

2010-03-09 01:54:00
John Kicklighter, Chief Currency Strategist

Dollar Unchanged on the Day as Risk Pressures Build in the Background
Though the dollar would ultimately finish Monday’s session little changed, the fundamental pressures behind the market were building. Looking at the Dollar Index, the day was a washout with the session ending directly in the middle of the range that has developed over the past month. And, while there was a little more activity amongst the individual major pairings, the close would largely negate any progress made towards a trend or breakout. For the market’s most liquid cross, EURUSD made an early tag of the recently-established 1.37 ceiling on current congestion and quickly retreated to more stable footing. In a similar manner, the controlled GBPUSD bull trend over the past week would be pulled back from its daily high to position the pair once again just above 1.50. Showing a better sense of development, the commodity-based pairs managed more technically appealing moves. USDCAD closed its seventh consecutive decline, matching the longest series of losses since the period through July 27th. Establishing equally impressive progress, AUDUSD rose to a six week high and NZDUSD breached a falling trendline that established resistance over the same period. Nonetheless, the ranges for all these pairs were comparatively small.

From price action alone, it would be nearly impossible to recognize the fundamental stress that is developing behind the scenes. Yet, the greenback’s status as the market’s favored safe haven and the appreciable rise in the currency’s benchmark market rate over its Japanese counterpart will undoubtedly amplify its reaction to meaningful shifts in investor sentiment. The dominate threat of the past few weeks – the possibility of a Greek default which could in turn undermine confidence in the European Monetary Union and the euro itself – has actually faded in recent days. This morning, discussion about creating a European fund that could be used to rescue any Union member that is at risk of failure has massaged confidence. Yet, to put such an ambitious plan into action and collect the necessary capital will likely take months. A near-term crisis could inevitably render this plan impotent. A more pressing driver of speculative interest is the Chinese government’s nullification of local government loan guarantees. It is estimated that a considerable proportion of the record lending through 2009 was assured in this way; and therefore the risk in a wave of defaults is substantially increased. Finally, there is the impact that the constant withdrawal of government stimulus has on capital markets and risk appetite. The Federal Reserve announced today that it would increase the number of acceptable counterparties in the bank’s tri-party repo agreements. This is another step towards increasing the amount of capital the authority will be able to draw out of the system. However, it is not yet fully clear whether the markets can carry their own weight without the explicit support of the government at large.

As for scheduled risk, Monday’s economic docket was barren. Going forward, though, the calendar fills out. Tomorrow, the top release is the National Federation of Independent Business’ small business optimism index for March. This indicator has received little coverage until recently; but considering small businesses account for the majority of American jobs and a considerable portion of its economic output; the indicator deserves closer review as investors speculate the nation’s pace of recovery. The official consensus is calling for a 17-month high reading of 90; but the details of the report is where the real value is derived. The outlook for sales, employment and profit are critical to the general outlook.

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

Euro Stability Improved by Plans to Create a European Monetary Fund
Like the US dollar, the euro was little moved on the day. Yet, currency traders would have both large policy considerations and notable event risk to digest. Attempting to prevent another flare up of panic surrounding the health of Greece (or any number of struggling European Union members), news has gotten out that officials are working to create a European Monetary Fund that would act much like the IMF as a lender of last resort for EU nations. This is perhaps the most practical and effective solution to the threat of a default among the group that has been entertained so far. Such a program would avoid the troubles of moral hazard, uneven financial strain on members and diminishing confidence in the union with seeking funds from outside the EU. On the other hand, it will take time to establish and confirm such a program; and there are very real near-term troubles. In the meantime, the Sentix confidence index revealed investor confidence in current conditions and expectations improved for the current month. Also, German factory activity grew 0.6 percent in January with energy output offsetting construction.

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

British Pound Struggles to Find a Firm Footing through a Round of Notable Event Risk

The pound is still tied to larger fundamental concerns that cover the nation’s economic health, burgeoning deficits and excessively easy monetary policy. Such broad-based topics are difficult to adjust short of sweeping policy reform or a dramatic shift in underlying investor sentiment; but consistent economic data can slowly put the outlook back on course or further diminish the currency’s recent recovery. Data released early in Tuesday’s Asian session, would do little to bolster confidence in the sterling. The RICS House Price Balance for February suffered its sharpest decline in 22 months when the annual reading slowed to a 17-percent pace of growth. The UK’s housing market has shown considerable signs of slowing as a short-fall in supply seems to be the primary catalyst for the incredible recovery for the market to this point. The BRC retail sales gauge would also disappoint despite the 2.2 percent annual growth because of the weak level of sales a year ago.

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

Japanese Yen Finds Little Guidance on Risk Trends but the Economic Outlook Develops
Normally, when sentiment trends abate, those currencies that are highly sensitive to speculative interests are left to their own devices and can fluctuate based on fundamentals. However, for the yen, the currency’s status as a funding currency is so engrained that there is generally little reflection on fundamentals. Nonetheless, there was remarkable event risk to speak to the economy’s financial health. The drop in bank lending stalled in February for the first time in 13 months, bankruptcies declined for a seven month and the Eco Watchers survey hit a 7-month high.

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

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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