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US Dollar Awaits the Return of Liquidity, NFPs and the G-20 Meeting

US Dollar Awaits the Return of Liquidity, NFPs and the G-20 Meeting

2010-05-29 02:11:00
John Kicklighter, Chief Currency Strategist
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Starting with the most expansive and recurring fundamental driver the dollar faces, underlying investor sentiment is difficult to properly benchmark. Come Monday, things may still be quiet as both the US and UK markets are offline for holiday. However, when things pick back up on Tuesday, we will have a precedence of high volatility and a steady stream of (relatively) discouraging news that has until recently found a very receptive and bearish crowd. Is this pause a sign that the masses are no longer worried about another lull in the global economy or a second financial crisis? If that is the case, there may be a significant reversal ahead of us. The dollar has rallied nearly 18 percent on a trade-weighted basis over the past six months. This is the performance of a safe haven. For those assets with a positive link to risk, we have seen dramatic deleveraging and declines in benchmarks to match. The most accessible driver for sentiment considerations going forward is a refocus on the EU’s troubles. However, now we have a possible Korean war, a Chinese asset bubble and sovereign debt concerns the world over among other things.

While many may simply attribute the greenback’s performance so far this year to its role as a safe haven and move on; they are missing an important fact. The economic and interest rate expectations for the US economy are better than many of its primary counterparts. For interest rates, the market may only be pricing in 42 basis points worth of hikes from the Fed over the coming 12 months; but that is still better than the ECB (40), BoE (26.3), SNB (9) and RBA (18). What’s more, this past week, the OECD would recommend movement on the central banks part before the end of the year and Board of Governors actually announced its schedule for Term Deposit Facilities.

Speaking of growth and interest rate speculations – not to mention risk appetite – the most prominent event over the coming week is Friday’s NFPs. This employment indicator has been hit or miss these past few months as the struggle that comes with absorbing 8 million lost jobs while meeting new entrants comes to light; but this month’s reading may be different. Looking at the Bloomberg consensus, we see a forecast for a 500,000 net increase. Though it may be a factor of calculation; this could still spark the animal instinct in traders.  - JK

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