- Australian Dollar Tumbles Following the RBA’s ‘Surprise’ Hold on Interest Rates
- Euro Weighed by Weber’s Discouraged Outlook for Germany
- British Pound: The BoE Countdown Begins
US Dollar Eases for a Second Consecutive Day as a Light Docket Exposes Risk Trends
There were few economic releases on the US and global dockets Tuesday; and quiet market conditions often encourage trend development – be it bullish, bearish or sideways. Taking the greenback’s temperature, the dollar index extended its pullback from seven-month highs set just yesterday. However, it is worth mentioning that the currency’s losses over the past two days have been more muted than the parallel gains in the Dow Jones Industrial Average or Gold. This is a tentative observation; but it could point to changing tides for the dollar and its role as a funding currency. It is still early to gauge what kind of carry conditions will develop after the current correction in risk appetite is complete; but the greater the unwinding of 2009’s build up, the more cautious investors will be when establishing high risk/reward positions down the line. And, a sensible analysis of interest rate forecasts certainly does not keep the dollar at the bottom of the spectrum nine to twelve months down the line.
However, while risk trends are fleshed out, the fundamental currents continue to run. For event risk today, there was only one notable macroeconomic event scheduled for release. Pending home sales elicited fear over the stability of the housing market’s recovery last month when the November reading reported record-breaking 16.4 percent drop. Yet, speculation that this sharp drop was merely the product of Americans waiting for the extension of the tax credit for first time home buyers was validated by December’s tame 1.0 percent advance. The Fed and government have offered forecasts that see the housing market offering a tempered source of strength for the economy going forward; and this data supports that notion. Switching from scheduled event risk to officials’ commentary, Treasury Secretary Geithner testified before the Senate Finance Committee this morning. Following the grilling he received last week, the policy maker said the government was now looking at the difficult job of balancing stimulus vital to the recovery and deficits that posed a ‘corrosive threat’ to the economy if they were left unchecked. Geithner said the priority is now growth, jobs and confidence; but lending is still a concern of its own.
For fundamental drive over the coming 24 hours, the ISM Non-Manufacturing Composite is a notable piece of event risk. As services account for approximately 70 percent of US output, the reading clearly has its influence over growth forecasts.
Furthermore, since this sector represents the majority of jobs the economy supports; this indicator’s employment component will be particularly useful for developing forecasts for this Friday’s non-farm payroll report. Currently, the forecast consensus is calling for a net 10,000 increase in jobs.
Australian Dollar Tumbles Following the RBA’s ‘Surprise’ Hold on Interest Rates
It was perhaps a surprise for economists and many market commentators; but the Reserve Bank of Australia’s decision to hold its benchmark lending rate at 3.75 percent should not have caught fundamental currency traders off guard. Following the November 30th meeting, Governor Glenn Stevens took a distinctly neutral shift in his outlook for monetary policy. Further working against a hawkish outcome to this looming event, the quarter-point hike that resulted from the last gathering was the first time in history that the policy authority would move to tighten the reins at three consecutive meetings. Considering inflation trends are currently at the bottom of the central bank’s target band, the Australian economy is attempting to establish a steady pace of growth when much of the world is struggling to recover from recession and Chinese authorities are actively cooling their economy and markets; it would have been fundamentally imprudent to maintain a steady pace of hikes.
Nonetheless, all 20 economists surveyed by Bloomberg were calling for a hike and Credit Suisse overnight index swaps were pricing in approximately a 76 percent probability of a hawkish outcome. This event has delivered a healthy dose of reality; and the Australian dollar has seen its appeal as a standout, high-yield currency diminished. If risk appetite was not generally buoyant today, the Aussie currency would have likely posted a far deeper retracement. Though, such a move could still be on the way considering how much speculative premium was built up behind the rate forecast.
Euro Weighed by Weber’s Discouraged Outlook for Germany
Scheduled fundamental event risk was relatively light for the euro Tuesday. The German retail sales data for December would fall in-line with expectations for a 0.8 percent increase (this is a relatively modest market-mover anyway considering its month-to-month volatility); and the Euro Zone factory gate inflation report for the same period would entertain little hope for a near-term rate hike with an annual reading of -2.9 percent. The real fuel fundamental update would come from Bundesbank President Axel Weber. The policy maker said Germany’s economic recovery would be increasingly dependent on exports this year. Furthermore, his outlook for labor conditions to further deteriorate and an increase in insolvencies offered specific threats for traders to monitor over coming months.
British Pound: The BoE Countdown Begins
There were a few notable economic releases on the UK economic docket; but the data would struggle to find its place while the market was still distracted by overriding risk sentiment trends. The construction activity report for January followed the lead of the previous day’s manufacturing report by climbing. However, this reading was still notably below the 50 expansion/contraction level. More influential was the Nationwide Consumer Confidence report for January which rose more than expected but is still notably below the highs of the third quarter of 2009. Moving forward, the sterling will most likely take its cues from sentiment trends. Where risk appetite fails to catalyze a larger shift for the pound, the presence of Thursday’s BoE monetary policy meeting will dampen unnecessary volatility.
