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Dollar Regains Its Footing Ahead Of A Very Busy Week

Mon, Mar 30 2009, 05:41 GMT
by John Kicklighter

DailyFX

• Euro Slips As German CPI Numbers Lower The Outlook For The ECB Rate Decision

• Pound A Risky Bet For Next Week’s Focus On Financial Troubles

• Japanese Yen Finds Risk Aversion A More Influential Driver Than Weak Retail Sales

Dollar Regains Its Footing Ahead Of A Very Busy Week
After a week of chop, the US dollar was finally able to retrace some of the sharp losses suffered last week following the Fed’s decision to pursue a policy of quantitative easing. The rally was seen across the board; but the most prominent advance was made against the greenback’s most liquid counterpart: the euro. EURUSD finally slipped below 1.3415 on a more than 300-point drop through Friday’s close. So what was the bullish fuel for the US dollar? A round of second tier economic indicators crossed the wires this morning; but its influence was generally mixed. The Department of Commerce released personal income and spending figures that did little to suggest the consumer sector would generate a quick rebound for the US economy. According to the data, incomes fell more quickly than expected through February - by 0.2 percent. Alternatively, spending rose 0.2 percent following a positively revised 1.0 percent jump the previous month. This would seem to be a mild set of data with a positive edge garnered through a consumer base willing to spend its way out of its recession. However, looking more critically at the data, we can see it was far from promising. The headline numbers come out to a rate of savings that is at its highest in 14 months. What’s more, the rise in spending was largely due to inflation; as price-adjusted figures actually fell 0.2 percent.

Rather than following the lead of the economic calendar, dollar traders were keeping tabs on risk appetite. Confidence seems to have built through most of this week despite a lack of fundamentals that could genuinely bolster such sentiment. Sure there was a round of strong housing data and rebound in durable good orders in the US; but this doesn’t make up for the recent record lows much of this data is attempting to pull itself up from. At the same time, the threat of protectionism has swelled with time as policy officials run out of options to correcting their own economic difficulties, putting focus on trade agreements that may put local workers and businesses at a disadvantage. The World Trade Organization made note of this trend today and said it would encourage the world’s richest countries to avoid breaking global ties at next week’s G-20 meeting. This gathering of leaders from the world’s largest economies will no doubt be top event risk, not only for the dollar, but the entire financial market. The US currency will be fully vested in these meeting for a few reasons. First and foremost, traders will look for commentary based on the greenback’s status as the world reserve currency. A shift to a basket has distinct economic benefits and has been expressed by many influential players; yet it is still considered highly unlikely. The more general concern will be whether or not leaders can finally produce a global, coordinated plan for stabilizing the financial markets and global economy. This too is doubtful.

With all the focus on the Group of 20 meeting on Thursday, we should make it a point not to forget the NFP release the following day. As one of the primary, leading indicators for growth, this data will be analyzed for its short-term impact on volatility and long-term influence on the United State’s yawning recession. Economists are forecasting another 660,000 jobs to have been lost through March, which would bring the total losses since January of 2008 to more than 5 million. President Barack Obama’s warning of a double digit unemployment rate is gaining traction. In fact, according to Labor Department statistics released today seven states already have jobless rates above 10 percent.

Euro Slips As German CPI Numbers Lower The Outlook For The ECB Rate Decision
Where is the euro’s place in the currency spectrum? Nine months ago, fundamental traders were treating the currency as if its economy would be able to avoid the worst of the global slump and maintain a competitive benchmark lending rate in the process. This bias has clearly been exercised by serious financial troubles, round after round of recession-based data and a consistently dovish central bank. Today’s data set a disappointing pace heading into next week’s significant event risk. From the growth front, industrial new orders sank a record 34.1 in the year through January. This follows the industrial production figures for the same period which also contracted at their fastest pace on record. Data like this will no doubt be mulled over for the G 20 meeting by leaders in the US and UK who have been calling for the Euro Zone (along with others) to boost fiscal spending. Rates, however, may be the bigger issue for euro traders next week. With the ECB expected to cut its benchmark rate another 50 basis points to 1.00 percent next Thursday; the German CPI numbers released today set a bad precedence. Inflation in the region’s largest economy slowed to 0.5 percent – the slowest pace since 1999. Now we have to wonder will they even stop at 1.00 percent.

Pound: A Risky Bet For Next Week’s Focus On Financial Troubles
The scheduled UK event risk to come down through the wires was lacking in market-moving potential Friday. The Office for National Statistics reported a sharper than expected contraction in the UK’s economy through the final reading on fourth quarter GDP numbers. The 1.6 percent drop through the three month period was the worst since 1980 and included the worst levels for construction and consumer spending in over a quarter century. This data merely verifies forecasts for the United Kingdom to suffer the worst recession in the industrialized world through 2009 and thereby cements the sterling’s connection to the outcome of next week’s G 20 meeting. Should the world’s leaders come through with a coordinated rescue plan, it could relieve some of the burden on the UK economy as positive results could come more quickly rather than the global momentum behind the world-wide recession burning through Britain’s stimulus money. Otherwise, at the front of the recession curve, the pound will succumb to growing fears that Prime Minister Gordon Brown’s and the Parliament’s policy efforts are doomed to fail.

Japanese Yen Finds Risk Aversion A More Influential Driver Than Weak Retail Sales
Japanese data is frequently overlooked by currency traders; but since the yen’s safe haven status was called into question by the economy’s sharpest tumble since 1974 through the fourth quarter, the market’s interests have changed. Early in the Tokyo session, the government released inflation and retail sales data for February. Already bereft of income and sentiment, consumers spending on retail goods dropped 5.8 percent in February from a year ago. This was the worst decline in seven years. Perhaps the greater issue though was the nation’s slip back into deflationary territory. Those market participants that were around before and after the Asian financial crisis know that deflation combined with recession and financial instability have long crippled the Japanese markets and economy. However, despite all this, the yen would still finish the session much higher as traders throttled back on risky bets ahead of next week’s fundamental fireworks.

Published on  Mon, Mar 30 2009, 05:44 GMT