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Dollar Edges Higher Despite Dour GDP Readings, Risk Looms

Fri, Mar 27 2009, 05:53 GMT
by Terri Belkas

DailyFX

• Pound Pulls Back After Dismal Retail Sales Figures And Darling Limits Stimulus

• Euro Sees Potential Volatility After ECB Member Mentions Policy Beyond Rate Cuts

• New Zealand Dollar Steady Despite A Sharp Drop In GDP

Dollar Edges Higher Despite Dour GDP Readings, Risk Looms
The US dollar was on-balance strong through Thursday’s close despite a round of disappointing economic data crossing the wires in the early New York session. The final reading on fourth quarter GDP was projected to be the top market-moving release for the day; but this data came with tempered expectations for volatility. The first reading of growth holds the greatest potential as the market has no grounding with which to benchmark the health of the economy. From there, the first revision is prone to substantial revisions as was seen back on February 27th when the ‘preliminary’ indicator issued an adjustment that pulled the original 3.8 percent annualized contraction down to a far-more severe 6.2 percent plunge. For the final reading, the headline number actually printed slightly better than the official consensus with a 6.6 percent tumble. This quarter-over-quarter change aside, we should not lose sight of the bigger picture. This was the worst annualized performance for the world’s largest economy since 1982. What’s more, it is worth noting the trend behind the component figures. Personal consumption fell 4.3 percent through the final quarter of 2008 – its steepest decline since 1980 – and considering the consistency in job losses, the largest component of growth is likely to weigh overall GDP down even further through 1Q. Equally disturbing was the most aggressive drop in corporate earnings (at 16.5 percent) in 56 years. These are not the indicators of confidence - even on a relative basis with a global economy in recession.

Considering the state of the lagging GDP numbers and aggressive response from policy officials recently, some have taken the opportunity to forecast a bottom. However, there is little support from more recent data to support such a theory. Despite the surprise pick up in durable goods orders yesterday and the series of positive housing numbers this past week; all of these sectors are still near their recent record lows. What may truly define expectations for growth over the first and second quarter of this year will be consumer lending and spending. As the largest driver of growth, the American populace has to overcome significant hurdles to bolster optimism, find loans and fight the growing urge to hoard their dwindling income. In the meantime, today’s rolling jobless claims jumped to a record 5.56 million. The non-farm payrolls report for March (now expected to print another 660,000 jobs lost) looms larger with each passing day.

Despite the significance of today’s data, the dollar would not produce the pressing breakouts that the majors have backed up to over the past week. With the entire global economy steeped in recession, it is clear that market participants have grown desensitized to individual growth figures. However, they have certainly not prepared for the possibility that the US dollar may lose its status as the world’s reserve currency. Today, a UN panel of economists recommended a new global reserve system, which they have said could “contribute to global stability, economic strength and global equity.” There is little chance the UN would be able to encourage the world to take such a step; but it gives legitimacy to those who bring up the same argument at the G-20 summit next Thursday. Stay tuned.

Related Article: Top 5 Market-Movers for the Week of 03/23/09, Dollar Stalled As Reserve Currency Status Threatened

Pound Pulls Back After Dismal Retail Sales Figures And Darling Limits Stimulus
How bad can the situation in the United Kingdom get? Months ago, the IMF Forecasted the European country would suffer the worst recession of the major industrialized nations through 2009. Consumer spending data released today added further weight to this outlook. Through the month of February, retail sales reportedly fell 1.9 percent on the month while receipts grew at a feeble 0.4 percent pace over the year – the worst level of activity since 1995. This is just one more piece of data that has added to the growing political strain in the United Kingdom. Leveraging yet another weight on Prime Minister Gordon Brown’s shoulders, Chancellor of the Exchequer Alistair Darling suggested today in testimony that he would be putting limits on further rounds of fiscal stimulus. Brown, along with US President Barrack Obama, has lobbied the world’s largest governments to increase spending to recharge growth. Until they do, the recovery of the global economy will depend on the actions of a few of the largest players – a situation that could end in crippling failure.

Euro Sees Potential Volatility After ECB Member Mentions Policy Beyond Rate Cuts
Price action behind the euro crosses was volatile but ultimately lacking direction Thursday as the fundamental crowd awaited the bigger event risk expected to come down the line next week and settled into the general sense of congestion taking over the rest of the market. Today’s economic calendar wasn’t empty though. The German GfK consumer confidence survey reported its first decline in seven month with its April reading. All three of the main components behind the indicator (economic outlook, income expectations and willingness to buy) fell. Of greater interest this morning though were comments made by ECB member Lucas Papademos. The central banker suggested policy officials may extend loans made to euro-region banks and begin buying corporate bonds in order to “enhance liquidity” and “improve the cost of funding.” This is an interesting step as it points to steps beyond the normal adjustment of the target rate and recurring lending facilities the ECB has stuck with in the past – steps that both the UK and US took before they dropped rates to near-zero. The central bank is expected to cut its benchmark another 50 bps at next Thursday’s meeting. Tomorrow’s German CPI numbers will likely bolster these forecasts.

New Zealand Dollar Steady Despite A Sharp Drop In GDP
The New Zealand dollar was heading into its most meaningful round of fundamental data in weeks through the open of the early Asian session. On deck were fourth quarter GDP and February trade balance numbers. Of the two, the growth report clearly took precedence. In a market vacuum, the 0.9 percent drop in economic output through the third quarter and 1.9 percent contraction through the year would send the kiwi dollar careening. This is the worst pace for the island nation since 1991 and a clear blow to the necessary safety aspect of a currency whose role is one largely rooted in its relatively high yield. However, the markets do not operate in a vacuum; and since forecasts were worse than the actual numbers while the trade balance unexpectedly surged to a near five-year high surplus, the currency held steady initially after the releases.

Published on  Fri, Mar 27 2009, 07:25 GMT