- Dollar Reports a Muted Reaction to Chinese Rate Hike and Noteworthy Fed Speak
- Euro Rebound will be Short Lived Without a Tangible Improvement in the Forecast
- British Pound Stumbles Early on Bank Levy but Interest Rate Speculation Heating Up
- Canadian Dollar Tumbles Though Data Uneventful and Oil Prices Recover
- Swiss Franc Suffers the Biggest Drop on the Day, But What was the Catalyst?
- New Zealand Dollar Stumbles after Finance Ministers Says a Second Half Recession is 'Possible'
Dollar Reports a Muted Reaction to Chinese Rate Hike and Noteworthy Fed Speak
This week is proving to highly unusual for a trader's perspective - but that was the situation we were ultimately expecting heading into the period. Some may argue that there was considerable activity and a clear manifestation of fundamental developments through Tuesday's session; and there certainly were a few stand out moves. However, labeling volatility and the semblance of a trend in a few isolated incidences does not make for an overall market trend. More importantly, the conflicting performances from various currencies and asset classes suggest most burgeoning trends are ultimately doomed without an underlying driver to facilitate momentum. Establishing a sense of underlying activity for the past trading session, we note first that the S&P 500 (our rudimentary benchmark for investor sentiment) rose for fourth consecutive session to set a new two-and-a-half year high. That said, we should be familiar enough with the irregularity of equities performance (supported by stimulus funds and other transient factors) that we don't just accept this climb at face value. Indeed, a closer look shows yet another low in volume for the year - not an encouraging sign for conviction. Furthermore, we see further discord in the lack of correlation with the FX market. Carry interest was generally tepid while an early dollar stumble was largely retraced. This was particularly interesting given fundamentals.
With the new highs in equities drawing the speculative market's attention, we first take a look at risk appetite trends. Gauging the balance between fear and greed, the People's Bank of China (PBoC) could have delivered a shock to the system with the third hike to its benchmark lending rate since mid-October. As the world's benchmark for growth and returns, any effort to slow expansion and curb capital inflow is general seen as a dampener for the potential for global returns. And, just a few months ago, such a move would have at the very least led to a quick and aggressive drop in all assets that are sensitive to risk trends. Alas, this time around, the market absorbed the news and carried on. This could be partly attributed to the fact that Chinese markets were closed for the holiday (they are falling this morning); but more likely, market participants have become acclimated to the effort to cool the powerhouse and instead see it as a means for stabilizing its ascent. Without the market on edge with a pressing financial crisis somewhere in the world, traders will warily seek out yield.
Without a push towards risk aversion, the dollar was left short a significant, potential driver. Yet, the greenback would find some measure of support much later in the US session with a round of Fed chatter. Three central bankers were on the wires Tuesday; and each would edge a little further towards the hawkish extreme. The only currently with a vote on the FOMC, Dallas President Fisher repeated his statement that he would not likely vote for another round of stimulus should it be brought up. Furthermore, he said the Fed was 'pushing the envelope' with asset purchases. The least forceful member, Atlanta Fed President Lockhart said QE3 was unlikely; though he did little to frame the end of the line for existing stimulus. Without a vote of his own, Richmond Fed President Lacker set the most serious tone in saying conditions may warrant a serious re-evaluation of the current $600 billion stimulus program. Too bad he doesn't have a vote. Nonetheless, this tells us that the discussion of tightening the reins is circulating; and speculation picks up on these trends early. Now, let's see what Bernanke says.
Euro Rebound will be Short Lived Without a Tangible Improvement in the Forecast
The euro was making the effort to rally through Tuesday's session; but its recovery is proving itself to be fundamentally troubled. There was little in the way of scheduled event risk for the day; but the German industrial production figure for December unnerved more than a few euro investors. The region's power source reported a 1.5 percent drop in output which was largely attributed to the 24 percent drop in construction activity - which they say is a weather influence. Data aside, it is important to keep our focus on the region's financial stability. Italy's rebuffing of Germany's call for action on those countries that run deficits over specific limits is just another example of discord preventing an EU fix.
British Pound Stumbles Early on Bank Levy but Interest Rate Speculation Heating Up
Thursday's Bank of England rate decision is a focal point for the sterling traders - even though the meeting will most likely end without a change in policy and lack a statement. The reason: speculators are fully capable of deriving their own expectations for interest rate potential - and expectations are surely rising. That said, Chancellor of the Exchequer Osborne dampened bullish expectations somewhat Tuesday by moving up a bank levy that would supposedly pull in 800 million pounds from the financial sector. However, if we are talking interest rate potential, the more recent release of the updated CBI inflation forecasts for 2011 (up to 3.9 percent) should carry more weight for the hawkish.
Canadian Dollar Tumbles Though Data Uneventful and Oil Prices Recover
Attributing the Canadian dollar's movement to the slightly weaker-than-expected housing starts (a 170,400 pace) is a stretch. The loonie was a closer match to the volatility in the energy complex; but the consistent and sharp decline from the currency isn't exactly covered by the performance from oil. This is contained volatility. We need to find that clear catalyst that offers true trend and conviction.
Swiss Franc Suffers the Biggest Drop on the Day, But What was the Catalyst?
Of the most liquid currencies in the FX market, the Swiss franc saw the most dramatic price action through Tuesday's session - in a sharp tumble. This was a move that began in the European session; so attributing it to the employment data, risk trends or the Chinese rate shift rings hollow. Realistically, this currency is charting the outlook for the euro. Without uncertainty, the franc will continue to pull back from record highs.
New Zealand Dollar Stumbles after Finance Ministers Says a Second Half Recession is 'Possible'
The kiwi was content to simply follow risk appetite trends through Tuesday's session; but come Wednesday, the currency had a domestic catalyst to incorporate. Finance Minister English remarked to parliament that it was possible that the nation slipped into recession through the second half of last year - a development that would certainly curb interest rate expectations for the traditional investment currency.
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Written by: John Kicklighter, Currency Strategist for DailyFX.com
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