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•Dollar Boosted by Risk Aversion and Data, Rallies to a Two-Week High
•Australian Dollar Weighed by RBA Commentary, How will GDP come across?
•Euro Finds No Fundamental Foothold in German Employment Data
•Pound may be Oversold, but Data Continues to Deteriorate

Dollar Boosted by Risk Aversion and Data, Rallies to a Two-Week High
The dollar finally made significant headway through Tuesday's session; but should we treat this as a definitive turn for the world's most liquid currency? At face value, the move was pretty impressive. The greenback closed its biggest advance since August 7th and topped highs not tested in two weeks. More importantly, for most of the majors, this rally was significant enough to ward off the threat of an imminent and absolute breakdown for the battered currency. However, does this really mean the dollar has been put on pace for a long-term recovery? Unlikely. Thin liquidity has leveraged volatility for a few weeks now; and the tight ranges that the majors have held demanded a break sooner or later. In essence, the dollar's rally was the path of least resistance as it doesn't by its nature purport the development of a new trend. This is perhaps better read through technicals. Despite EURUSD's sharp decline today, the pair is still holding to the rising trend channel that has developed a mild, bullish bias since mid-June.

On the other hand, should the dollar take up the cause of risk aversion; then today's developments could hold a greater meaning in terms of long-term trend. It isn't a stretch to suggest that over the past few months that sentiment has run awry of fundamentals. What's more, this is not an obscure consensus. Whereas the markets could have been considered severely depressed following the panic selling during the worst of the financial crisis; a subsequent balancing of sentiment doesn't naturally lead to a long-term bull trend. Eventually, the recapitalization of the markets (with sidelined money) will taper off and the demand for return will naturally look to tangible fundamental trends for actual growth. It is this equivocal disparity that has slowed the market's progression and will no doubt lead to its eventual correction. Yet, we are still burdened for a catalyst to such a move.

Being the largest economy in the world, it is natural to presume economic trends will stand as a proxy for the entire globe; and therefore, US data would have a greater influence on price action. In this capacity, today's data didn't have the sway to set the pace for a strong economic recovery or double dip recession. Nonetheless, it has refined the outlook. The August ISM manufacturing was the top market mover for the US session; and the data certainly contributed to the dollar's strength. Already expected to report growth (a reading above 50 denotes expansion), the sector reading actually outpaced forecasts with a 52.9 reading that matched the highest reading in three years. The sixth monthly increase in pending home sales and unexpected dip in construction spending were notable but ultimately far less influential. Looking ahead, the only, single economic indicator that can be reasonably expected to carry the weight of investor sentiment on its own is Friday's NFPs.

Related Article: US Dollar, Euro, Commodity Dollars to Face NFPs, GDP, and Rate Decisions; Is Risk Appetite Deferring to Fundamentals?

Australian Dollar Weighed by RBA Commentary, How will GDP come across?
While it may be the case that risk appetite has overstepped its bounds, many think the Aussie dollar is a different case. The Australian economy was able to avoid a technical recession and has maintained a significant rate advantage against most of its major counterparts. Yet, there is an equilibrium for even this outperformer through fundamentals and exchange rates. After appreciating nearly 35 percent against its US counterpart, market participants have already accounted for a significant head start for expansion and rising interest rates. However, maintaining a positive differential on both these fronts with its industrialized peers doesn't necessarily mean the economy will immediately return to an aggressive pace of expansion and rate hikes. In fact, the significant increase in the second quarter current account deficit - and more poignantly, the 19 percent drop in exports - reflects a severely stunted source of growth. The RBA is certainly aware of downside risks to growth going forward considering Governor Glenn Stevens, after the decision to keep the benchmark unchanged for the fifth month at 3.00 percent, said the current level was appropriate for the time being. This is clearly a wait-and-see move and it has certainly deflated expectations for a rate hike this year. Looking ahead though, the 2Q GDP data due tonight may bolster the case for a 25bps hike in perhaps November or December. The expected 0.2 percent performance for the period would be a moderation from 1Q; but the market will remain sensitive to upside surprises with public spending monitored for its ability to offset poor trade and corporate earnings data.

Euro Finds No Fundamental Foothold in German Employment Data
Among the most liquid currencies, the euro is considered to be one of the most fundamentally sound. This may be hard to reconcile with a significant recession and lingering financial troubles with Eastern European loans; but a relatively hawkish ECB and surprise return to growth through the second quarter for the Euro Zone's two largest economies has nonetheless offered a platform for such speculation. Today's data furthered these projections. While the regional unemployment ticked up to a more-than-10-year high as expected, the leading German employment report more than made up for it. Eurpope's largest economy saw the number of jobless drop by 1,000 in August, marking the first back-to-back contraction since the incredibly consistent series ended its steady rise in jobs last October. This may be a very early sign of strength; but it ultimately has the same impact that the positive 2Q GDP reading had last month.

Pound may be Oversold, but Data Continues to Deteriorate
The British pound was no doubt caught up in risk appetite this morning as it sold off against most of its major counterparts. However, we shouldn't simply attribute this plunge to a bigger market theme and move on. The data that crossed the wires today says a great deal about the country's pace of recovery. The August manufacturing PMI report unexpectedly tipped back into negative territory and mortgage approvals rose to a 15-month high; but the real stand out was the credit figures. According to the BoE's statistics, consumers made a net 217 billion pound repayment on credit - the biggest on records going back to 1993. From a long-term economic perspective, this is a balance sheet improvement; but through the short-term, reviving growth will likely fall on the shoulders of consumers who have fewer jobs and smaller incomes.

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Written by: John Kicklighter, Currency Strategist for