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Dollar Bullish Breakout Fully Disarmed after Market Absorbs Greek Fears, US GDP

Dollar Bullish Breakout Fully Disarmed after Market Absorbs Greek Fears, US GDP

2010-05-01 00:10:00
John Kicklighter, Chief Currency Strategist
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Dollar Bullish Breakout Fully Disarmed after Market Absorbs Greek Fears, US GDP
Friday’s session was an unfavorable one for the US dollar even though scheduled event risk was largely supportive for the benchmark. It would be easy to simply attribute the currency’s third consecutive daily decline on progress founded in risk appetite; but sentiment trends have progressed little through the second half of the week. Since the mini market panic this past Wednesday, when Greece’s debt was lowered to junk status and a Portugal downgrade sparked fear that an isolated problem in the European Union was blooming into a global threat, concern has dissipated substantial. As discussed yesterday, this can be described as a desensitizing to a threat that seems ever-present; but it does not mean that the risks to global growth and financial health have vanished. If anything, the hazards continue to grow and the threat of another crippling crisis nears. Yet, while holding to one’s fundamental convictions may be admirable, fighting the current with a trading account is only guaranteed to lead to ruin. As for the greenback, the opportunity to turn a 12-month high into a solid bull trend has been lost. But that does not mean that new shocks, changing interest rate expectations or evolving growth forecasts can’t revive the currency’s bid for new highs.

From pure investor optimism to the less subjective qualification of economic health, dollar traders were prepared Friday for the advanced reading of first quarter GDP. For proxies, the Chinese growth reading for the same period had already set the pace for the emerging markets while the United Kingdom’s report lowered the bar for the G-7. However, the US holds a unique place in the ranks as the world’s largest economy with the most affluent consumer base and one of the largest financial markets. Given the tout the nation pulls, progress reports like this are market-wide events. As for the outcome of the data, the 3.2 percent annualized pace of expansion was weaker than expected (3.4 percent) and far slower than the six-year high 5.6 percent reading from the fourth quarter. However, the quality of the data showed improvement. Though the economy would grow at a faster clip in the final three months of 2009, momentum was founded in gross private investment – partially a result of government stimulus and extraordinarily low borrowing rates. Such a strong upsurge (which was largely the consequence of the previous year’s dramatic slump) would not be sustainable. Indeed, business spending would contribute 1.67 percentage points to growth where it accounted for 4.39 percentage points over the previous period. With government spending and net exports further detracting from activity, it was the consumer that would pick up the slack. The 3.6 percent expansion in personal consumption was the strongest reading since the first quarter of 2007 and steered the economy with a 2.55 percentage point contribution to the economy. More important than the historical statistics though, the shift in activity away from temporary factors like generous liquidity, government spending and inventory building to enduring aspects like consumer spending develops a sense of stability in the economy’s recuperation.

Looking ahead to next week, there are big ticket events scheduled for the US dollar and its peers; but what will be the biggest driver for the greenback? Given the currency’s sensitivity to risk appetite trends these past weeks, the passing of the EU/IMF financial assistance package for Greece could work against its safe haven status and encourage capital flows back to the euro (its primary counterpart). However, this is an uncertain element. Friday’s NFPs, on the other hand, may promise less volatility; but its timing is indisputable.

Related: Discuss the US Dollar in the DailyFX Forum, US Dollar Strength Depends on Nonfarm Payrolls, Euro Zone Resolution

Euro May Enjoy a Short-Term Recovery with the Passing of the Greek Rescue Package

The final three days of this past week have offered the euro some reprieve. While not fully recovering all of the ground lost through the proliferation of the Greek crisis, the euro’s rebound from 12 month lows should not be snubbed. This bounce is a sign that speculators are confident that the troubles in the European economy can be quelled. Whether that is a fundamental truth that can be realized is another matter. However, given the push in government debt yields and credit default swap premiums to record highs, the market must either be met with an imminent collapse or such rich premiums will recede. More than just buying time, the situation may actually improve should the European Union agree to release the aid it had promised to Greece weeks ago. Make no mistake, the injection of liquidity would help the nation cover its impending debt obligations and perhaps bolster market confidence in purchasing new issues; but it will not solve the long-term pain that efforts made toward conforming to deficit restrictions will cause the economy. Any assistance that comes down will be attached to stringent demands – demands that will likely push the economy back into recession and incite the discontent of the masses. Should conditions continue to deteriorate despite any aid given, there is very little chance that another round of support will be agreed upon. 

British Pound Traders Prepare for Thursday’s Election and a Return to Trends
Though gilts would hold onto their gains through Friday’s close, the British pound lost its footing through the end of the week. Government debt was encouraged higher by optimism that the European Union would soon offer assistance to Greece (and perhaps other members) to avert a potential credit crisis. In turn, this would help to alleviate the UK’s own sovereign credit concerns in the process. However, to cut the anchor on sterling volatility, currency traders await Thursday’s election. While the outcome may alter market’s relatively little, uncertainty is itself unnerving.

Australian Dollar’s Strength Highly Susceptible to RBA Disappointment
The Australian dollar exhibited unnaturally high volatility through the week’s end; but the result of this activity was mixed. The initial advance through the Asian and European hours was encouraged by strong numbers in home sales and private sector credit; while the subsequent retracement had little obvious fundamental root. This reversal is likely related to the uncertainty in next week’s RBA rate decision. The market is pricing in a 55 percent probability of a 25bps hike to 4.50 percent. If the group passes, it could severely undermine the currency’s strength.

Canadian Dollar Dips on Sixth Monthly GDP Increase, Will Jobs Number Offer the Same?
Growth is not simply growth for currency traders. Expectations come into play. For the February GDP reading for Canada, the 0.3 percent expansion through the month was cooler than the previous 0.6 percent reading. Nonetheless, with six consecutive months of expansion, this tempering does little to diminish the loonie’s relatively strength in the world.

For Real Time Forex News, visit: http://www.dailyfx.com/real_time_news/

**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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