Dollar Finishes the Week Little Changed but Next Week's NFPs and Sentiment Rush Could Revive Trend
Dollar Finishes the Week Little Changed but Next Week’s NFPs and Sentiment Rush Could Revive Trend
The US dollar would mark an appropriate close for an otherwise directionless week. True to form, following Thursday’s impressive rally in risk appetite - and the natural plunge for the safe-haven dollar that would entail - the speculative ranks would completely reverse tack Friday. From a traders’ perspective, this is the outcome that would have been expected. To begin with, the entire week was defined by high volatility otherwise bound by congestion - even though most benchmarks (like EURUSD and the Dow Jones Industrial Average) remain on the verge of establishing the next leg of a major bear trend. Another reason the day was destined to be one of congestion was the approach of an extended holiday weekend for both the United States and United Kingdom. Both markets (meaning banks and exchanges) will be offline this coming Monday; and tradition has it that there is rarely a big move ahead of the liquidity drain into Friday’s close. If this tacit pact had not been in place, the day could have turned out differently. On tap for the risk-sensitive market today was something we haven’t seen all week: another blow to the European Union’s effort to prevent a financial crisis. Announced near the close of the London trading session, Fitch Ratings unexpectedly downgraded Spain’s sovereign debt rating one step from a top AAA to AA+. Given the level of debt, unemployment and austerity cuts this economy faces, such a move is not a complete surprise. However, as we have seen time and again; when sentiment is already weakened, discouraging developments like these simply feed the fire.
Turning from the dollar’s implicit relationship to sentiment trends to its explicit link to its own fundamental health, the data on available for release was largely mixed. Yet, at the top of the list for market movers, personal income and spending would further cast doubt over the United States’ fundamental advantage over its global counterparts. With the knowledge that consumer spending accounts for nearly three-quarters of the nation’s economic output, news that spending was unchanged in April sets the pace of recovery back. Having missed the forecast for a moderate 0.3 percent increase for the period, the reported marked the first time in seven months that the masses have not stepped up their consumption habits. On the other hand, the 0.4 percent increase in income at the very least implies wealth is still growing. Another disappointment was the Chicago / ISM measure of business activity for the current month. Against a consensus forecast for a 63.8 read, the indicator would print 59.7. This back step would pull the measure from a five-year high; but it was nonetheless the eighth consecutive reading of net optimism for the sector (assessed in a figure above the 50.0 level). The silver lining was also obvious from the University of Michigan’s consumer sentiment survey. An upward revision in the headline figure to 73.6 was encouraged by a pickup from the economic outlook component and a 19-month high in the one-year interest rate forecast.
Looking ahead to next week, there is plenty of opportunity for volatility, sentiment and fundamentals to collide in such a way that we can once again find a clear direction from the dollar and speculative markets. First things first, Monday will likely be deflated by the market holiday; but when the ranks fill out, traders will be back on pace. For market sentiment, Spain’s downgrade will be just behind us and the G20 meeting just ahead. Perhaps throttling interest rate and growth speculation as much as sentiment, Friday’s NFPs are looking at a 500,000 job increase.
Related: Discuss the US Dollar in the DailyFX Forum, Dollar Maintains Safety Appeal, Finds OECD Support for Fed Hikes
Euro Salvaged from Spain’s Rating Downgrade, Growth Revisions and Budget News by Liquidity
For currency traders, a lack of liquidity can be frustrating as it can oftentimes sidetrack potential trends. While there has been little sign of a real trend developing in underlying risk appetite or the euro this past week, news that Spain’s sovereign credit rating was being downgraded by Fitch could have been just what was need to spark the masses’ imagination of an impending default from within the European Union and perhaps the ultimate failure of one of the most fiercely debated economic and financial projects in modern history. Evaluating the situation, a one-step downgraded to AA+ is not itself a dooming move. Not only was this somewhat expected; but the level itself is just below the highest rating that a nation can have. On the other hand, Spain’s financing costs were already elevated before this move. Come next week, they will almost certainly push even higher. What’s more, a credit rating adjustment wasn’t the only thing that would happen to Spain Friday. Shortly after the sovereign downgrade, 14 classes of CDO’s guaranteed by the government were also lowered. Coincidently, the government itself had also downgraded its growth forecasts (which are still much higher than the IMF’s projections) and produced a 2011 budget that looked to cut spending 7.7 percent.
British Pound Reverses Course as Spain Revives Debt Concerns, Confidence Gauge Disappoints
It is hard to get a fundamental read on the British pound. This is because the currency has made no attempt to establish a clear trend since the general election wound down and there has been no clear correlation between its price action and larger fundamental trends that have developed in the background. However, the downgrade from Spain seems to have struck a nerve for the sterling today. Is this a sign that risk currency is inextricably linked to risk appetite (one step up from the euro on the list of currencies to sell in the event of disaster) or does this point to something bigger? With the news that ratings agencies are growing more critical of sovereign debt, the UK is looking more and more exposed for its own deficits. Will this be the next big fundamental driver for the pound? We may find out next week.
Australian Dollar May Accelerate Risk Aversion Losses with RBA Hold, GDP Shortfall
How times have changed. Only six months ago, the Australian dollar was considered untouchable given the premium it held for growth potential and the hawkish pace the central bank had just begun to set. Now, looking ahead to next week, the RBA is expected to pass its first meeting in months with a pass with a complimentary neutral statement. Furthermore, the 1Q GDP reading is expected to tick down to a 2.6 percent pace.
Canadian Dollar Looks for a Fundamental Backstop as the BoC Turns to Rate Hikes
If there is a mirror to the Aussie currency, it is the Canadian dollar. Next week, the first quarter annualized GDP number is expected to accelerate to its fastest pace in 10 years, while most other economies are leveling off. Furthermore, economists and market participants predict the Bank of Canada will raise rates in the first of a series of hikes. Now, already strong, the loonie will find further fundamental strength.
Written by: John Kicklighter, Currency Strategist for DailyFX.com
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.