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•US Dollar Awaits 1Q GDP Release, Volatility
•Euro Finds Little Support for Recovery Outlook from Rising German Unemployment
•Japanese Yen Finds a Brief Boost From Economic Forecast before Risk Appetite Takes Over
•Pound Makes Progress with Help from Risk Appetite and Housing Data
US Dollar Awaits 1Q GDP Release, Volatility
After Wednesday's aggressive advance, the dollar was left to retrace some of its gains as the markets hunkered down ahead of this week's top event risk. This is an interesting position to leave the majors. A few pairs (most notably GBPUSD, USDCAD and AUDUSD) have moved into position at the very anti-dollar extremes of their respective ranges. On the other hand, EURUSD, USDJPY and USDCHF have built in a significant cushion of space between spot and dollar support. This creates a situation where anything short of a significant surprise may trip up long-awaited breaks against the greenback or slow a meaningful retracement.
Before satisfying our curiosity surrounding this week's top event risk (tomorrow's second quarter GDP release), we should first take account of today's event risk as it will have its influence on the US economy and the dollar later down the line. The only scheduled release of note on the docket was the weekly initial jobless claims. Typically, these figures are overlooked for short-term volatility; but the implications for next week's non-farm payrolls more than compensates for a limited perspective. Initial jobless claims for the week ending June 25th rose to 584,000 filings (slightly better than expected); but the real value comes from the four-week moving average which essentially offers a monthly trend that is now at its lowest since January. What's more, the continuing claims figure has slipped to 6.197 million Americans, its slimmest since April 10th. Looking at far more invasive fundamental trends, the Treasury finished a record $115 billion worth of auctions this week with a $28 billion sale. Demand was bolstered over the previous two offerings this week, suggesting demand is balancing out the ample supply that is released upon the market as the US government tries to fund its stimulus efforts. Another interesting announcement today came from the FDIC which says it plans to sell the assets of failed banks in pieces - the performing assets going to the public and nonperforming loans going into a ‘bad bank'-like holding company. There is still a lot of toxic debt floating on bank and government balance sheets. It will be very important to see what is done with these assets going forward as a failure here could undermine a market that can threaten global financial stability.
Now, looking ahead to Friday; the market is preparing for what is perhaps the greatest piece of event risk this week: the advanced reading of 2Q GDP. Though we have already seen an early release from a regional leader (China reported a better-than-expected 7.9 percent pace of expansion over the same period) and a G7 economy (the UK feel deeper into its record-breaking recession); the US is considered a benchmark for the globe as it is the world's largest economy and is arguably the root of the current rout while simultaneously sports the greatest effort to stamp out the malaise. The question that most traders will ask is: will the actual pace of activity be better than or worse than the market consensus. However, the more important consideration is whether this indicator will be more applicable to the dollar or general risk appetite? Growth is an underlying, fundamental driver and speculators are trying to gauge which economies are leading and lagging the recovery. However, risk appetite seems to be equally essential to the market's consciousness; and it is hard to miss the dollar's role as a safe haven currency. How this data influences the world's most liquid currency will likely be related to the severity of its ‘surprise' factor.
Euro Finds Little Support for Recovery Forecasts from Rising German Unemployment
The euro was a mixed bag Thursday as it fell against its riskier counterparts and gained in those pairs it out-classed through yield and growth expectations. While underlying sentiment has a life of its own in these markets, event risk was similarly split. And, while short-term volatility may have been settled through risk appetite, the data will no doubt have a long-term impact. From the indicators released, there were two classifications: actual activity readings and sentiment surveys. As is expected with government stimulus at work and traditional investments on the rise, optimism is gaining ground. All of the Euro Zone surveys would improve for July; but it was the multi-month highs in the economic, business climate and consumer measures that were noteworthy. A critical condition of these indicators though is that most are still net pessimistic - much like general growth (a ‘better' pace of contraction). It is made all the more suspicious when hard data is still struggling to confirm a recovery. Despite the Bundesbank's recent claim that Germany's economy contracted only slightly through the second quarter and was on the path of expansion, the unemployment rate is at 8.3 percent. For the month, joblessness actually fell by 6,000; but this is attributed to seasonal factors. For a recovery of any substance, the consumer will have to be a pivotal contributor.
Japanese Yen Finds a Brief Boost from Economic Forecast before Risk Appetite Takes Over
How stable is the Japanese economy? This is a question that is not frequently asked when spot traders are looking for a low-yield ‘safe haven' counterpart to their carry positions. However, the nature of risk is much more closely melded to the potential of an economy. Through the past 24 hours, we have seen a hearty round of data that dampens expectations of a true recovery from the worst recession in recent history. Early Thursday morning, the government released its preliminary June readings for industrial production. A 2.4 percent increase for the month was not as remarkable as the 8.3 percent increase in manufacturing through the quarter - the largest increase since 1953. However, cost cutting and bolstering inventories won't fuel the economy for long. Other indicators reported a rise in the jobless rate to six year high 5.4 percent, tempered household spending and record drop in national prices. It is looking more and more like another ‘lost decade' for the Land of the Rising Sun.
Pound Makes Progress with Help from Risk Appetite and Housing Data
When will the United Kingdom catch up to the pack and close in on expansion? This is a question that both plagues the sterling but also endows it with a strong, positive correlation to risk appetite. As the outlook for the global economy improves, no industrialized economy stands to benefit more than the pound. Data released over the past 24-hours has laid some of the ground work for just such a recovery. Nationwide housing prices rose for a third month (though due to supply rather than demand) and consumer confidence held at its 15-month high. However, these indicators will likely have less impact than tomorrow's US GDP number. A strong case for growth will play to the currency's risk sensibilities.
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Written by: John Kicklighter, Currency Strategist for DailyFX.com