- Dollar: The Chance of a Change in Tone from the FOMC Minutes is Low but Risk High
- British Pound Surges after CPI Data, Volatility Threat Still Critical With BoE Report Ahead
- Euro Holds Steady Through Inline German GDP Figures, Plunge in Greek Economy
- Japanese Yen Drops Across the Board Despite Upgrade in BoJ's Economic Outlook
- Canadian Dollar will Show a Restrained Response to Second Tier Round of Data
- New Zealand Dollar Traders Prepare for Upstream Inflation , Business Activity Figures
Dollar: The Chance of a Change in Tone from the FOMC Minutes is Low but Risk High
Once again, the dollar's path and pace were determined by outside fundamental forces. It is easier to distinguish the benchmark currency's attachment to underlying fundamental drivers when we reflect on the lack of price action following what was undeniably an important round of scheduled US economic event risk Tuesday. Looking at price action itself, the dollar was primed for a breakout. Not only were the risk-sensitive AUDUSD and NZDUSD pairs on the verge of prominent trend reversal; but the liquid and more fundamentally-guided EURUSD and GBPUSD were at the very edge of dollar-favorable reversals while the risk appetite-neutral Japanese yen and Swiss franc denominated majors were staring down meaningful resistance levels. With the first fundamental tide already passed, we see that these liquid pairs remain anchored to congestion - even if a few have tested technical boundaries. Perhaps the US can take control of its own bearings with Wednesday's event risk.
For traders, there were two notable takeaways from the fundamentals developments Tuesday and the dollar's subsequent response. First and foremost, we should keep a wary eye on risk appetite trends. The persistent concern over Chinese economic and asset inflation (the change in the government's CPI weightings doesn't fool anyone), underwhelming European growth readings and US data falling short of its targets eventually led to a 0.3 percent slump from the benchmark S&P 500. This doesn't present much of a threat to the remarkable five-month rising trend; but it reminds us of how extended the market and sentiment are. From the data itself, the headline retail sales data from January fell short of the consensus; but at 0.3 percent growth, it nonetheless marks the seventh consecutive month of growth for consumption. This is yet another piece of data that suggests the economy is establishing a steady pace of expansion. As for the 5.3 percent-reading from the import inflation report and the TIC capital flows data, the contribution to a bullish economic and hawkish interest rate outlook are relatively modest.
Looking ahead to the upcoming US trading session, we may have a sleeper event that can drive the dollar via locally-sourced developments. Readings for housing starts, factory-level inflation and industrial production are all notable; but they won't materially alter the general consensus for relative growth potential or interest rate speculation. On the other hand, the FOMC minutes could carry a surprising level of influence. While we already know the outcome from the last meeting and there is a very small chance they will change their tone about monetary policy going forward; the leveraged reaction to a specific (if minor) alteration makes this an event to watch. A scenario developed by Goldman Sachs is that the policy authority may make reference to the eventual exit strategy for stimulus. This does not mean the Fed will be withdrawing QE2 early nor does it imply that the group will put a hard date on when the policy reins will be pulled in. Yet, that isn't exactly necessary with speculators. Just as surely as traders speculated months in advance of the official QE2 announcement, they will unwind at early signs of the exit.
British Pound Surges after CPI Data, Volatility Threat Still Critical With BoE Report Ahead
Though the pound initially slipped after the release of its consumer-level inflation figures, interest rate speculators quickly replaced the face-value fundamental traders. A perfunctory review of the morning's inflation shook out the overly sensitive speculative traders as the headline year-over-year figure merely printed inline with a 4.0 percent reading while the core measured was slightly under at 3.0 percent. Had this been a regular indicator; a correction would have been the appropriate response. However, the hawkish rate bias is too prevalent for this to be seen as a bearish outcome. With BoE Governor King noting in his fifth letter to the Chancellor of the Exchequer that there is a great deal of uncertainty on price pressures; there is more than enough evidence here to support intense speculation of an impending rate hike. This threat will be at the forefront of sterling fundamental conversation when the central bank releases its Quarterly Inflation report in the upcoming London session. Even a modest upgrade of their hawkish bias will amplify the already leveraged rate forecast. In the meantime, don't ignore the labor data.
Euro Holds Steady Through Inline German GDP Figures, Plunge in Greek Economy
For all currencies, there is a dominant fundamental driver (aside from risk appetite) that defines its future. For the euro, that theme is still the region's financial stability. However, without a perceptible crisis event for one of the members or swelling rates for the entire region, it is difficult to mark progress. That is where the 4Q GDP figures come in. They give us an economic perspective on what financial difficulty means for the group. Yet, with German and Euro-Zone GDP numbers printing close to consensus and Greece tumbling deeper into recession; market participants didn't see reason to materially change positions. Perhaps the upcoming Portuguese bill sale will hit closer to home.
Japanese Yen Drops Across the Board Despite Upgrade in BoJ's Economic Outlook
Along with the Bank of Japan's decision to hold the country's benchmark lending rate unchanged at 0.10 percent, the credit loan program at 30 trillion yen and asset purchase facility at 5 trillion; the policy authority would also raise its growth assessment for the first time in nine months. Yet, the bank's modest words seem to have reminded traders of the currency's funding position and financial trouble rather than boost faith.
Canadian Dollar will Show a Restrained Response to Second Tier Round of Data
We are still a couple days out from the release of Canada's January CPI data - economic data that can actually alter the still-buoyant 12 month forecast for 80 basis points worth of rate hikes from the Bank of Canada. In the meantime, loonie traders will make do with a growth update in the leading indicators composite, December capital flows and manufacturing sales data. Restrain expectations for volatility.
New Zealand Dollar Traders Prepare for Upstream Inflation , Business Activity Figures
Interest rate expectations behind the New Zealand dollar have dropped off over the past month. This is consistent with RBNZ Governor Bollard's dovish tone; but speculation surrounding the rate forecast will be exceptionally volatile going forward - and therefore so too will the kiwi dollar. The upcoming business activity indicator will be notable; but it is the upstream producer-level inflation readings for 4Q that will really weigh.