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• British Pound Comforted by Bank of England's Steady Hand
• Euro Looks like it May End up a Laggard in the Rate Game Given the ECB's Stance
• Australian Dollar Sees Another Dramatic Stretch to New Highs on Employment
• Canadian Dollar has a Busy Day Ahead of it with Employment, Trade and Business Activity Data
US Dollar and Dow on the Verge of Opposing Breaks
The markets are once again toeing the line. Market sentiment is threatening to revive momentum in the steady advance in optimism that began back in March; and the various asset classes are showing the effects. For the maligned US dollar, the revival of confidence over the past week has pulled the currency down (on a trade weighted basis) to tag lows not seen in 14 months before bouncing and setting a ominous double bottom with the September 23rd low. Setting up its own mark-or-break scenario, the Dow Jones Industrial Average has quickly climbed back up to eye the September range of highs around 9,850. Looking ahead, we could very well stall at these highs and build pressure for a breakout in the process (a likely scenario considering the weekend is fast approaching and we are running thin on critical fundamental drivers); but a genuine break will have to develop eventually. The question we should be asking is not when the markets will break; but will we have the momentum to sustain a trend after the decision on direction has been made.
It is easy to simply link the greenback's future to risk appetite and play the correlation between equities and the majors. However, there are other concerns that will eventually supplant this pure balance between fear and greed. The dollar's status as the world's reserve is an issue that is stealing the headlines at a more frequent pace. This morning, the Financial Times reported that Asian central banks (Korea, Thailand, Malaysia, Taiwan and Singapore) were coordinating heavily on the dollar's behalf. Not only is the low level of world's most liquid currency stunting exports; but the pace of its descent has brought uncertainty and financial problems of its own. The blatant dependency on Fed policy and the government's ability to manage its debts is clearly driving global leaders to start planning for a timely diversification. On the other hand, the dollar could take the helm on its own fate. Depending on officials' ability to handle a recovery, deficits and the currency; they could still manage to maintain the status of reserve (though there seems little chance that the greenback will ever regain the prominence it has maintained over the past generation). Data released this morning suggests the recovery is on track and perhaps ahead many of its counterparts. Initial jobless claims through the end of last week dropped to a ten-month low of 521,000, suggesting the crippling trend in unemployment is improving. Ultimately, growth rides on consumer spending; and on this front, the biggest month-over-month jump in ICSC chain store sales in 13 months through September sets the trend. Along with a near record low in the average 30-year FRM mortgage, the pieces for a recovery are falling into place.
British Pound Comforted by Bank of England's Steady Hand
Among the two central bank rate decision scheduled for Thursday morning, the Bank of England's announcement was considered to hold the more potential. Ever since Governor Mervyn King sided with the minority to vote for an expansion of their quantitative easing program and his suggestion that a cut to the deposit rate could be economically useful, the market has priced in the possibility that the Monetary Policy Committee (MPC) could take the next expansionary step in its stance. However, the central bank once again deferred such an effort when it announced its benchmark would remain at 0.50 percent and they planned to spend the rest of the 175 billion allotted for their bond purchasing program. Weighing in just after the decision, former MPC member David Blanchflower said in an interview that the bank should both increase its bond purchases and cut the rate at which banks earn on their reserves. His comments bear consideration as we have heard musings from active members that follow the same path and considering the economy has shown signs that its recovery is flagging. With a government spending in the pipeline, there is deadline for officials to do as much as they can to jump start and establish financial stability. We will have to look at the minutes of today's meeting (due Oct. 21st) do see if there was dissention among the voters and further suggest more dramatic measures can be taken at the next meeting (on Nov. 5th) when officials have new forecasts to work with.
Euro Looks like it May End up a Laggard in the Rate Game Given the ECB's Stance
The euro is still being treated as one of the strongest currencies amongst the majors; but is this potency really coming from the outlook for growth and interest rates? Today the European Central Bank (ECB) delivered no surprises in its decision to maintain its benchmark lending rate at 1.00 percent. Comments to follow this pass noted that the current level of the region's target rate was appropriate, and the future would likely hold an uneven recovery and subdued inflation. So, even though loan demand has diminished and the Euro Zone's largest economies have already returned to growth, there seems little desire to rollback stimulus anytime soon. Overnight index swaps from Credit Suisse are pricing in 85.6 bps of hikes over the next 12 months; but this is likely to be come from firming well into next year. If the central bank continues to rest on its laurels, the euro will likely lose bullishness provided by its yield. If that is the case, the currency will increasingly fill a role as the counterpart of the US dollar - for better or worse.
Australian Dollar Sees another Dramatic Stretch to New Highs on Employment
All the fundamental lights seem to be turning green for the Australian dollar at the same time. Following the ‘surprise' rate hike from the RBA Tuesday morning, the economy reported unexpected job growth through September. According to the Australian Bureau of Statistics, 40,600 net jobs were added last month and the unemployment rate ticked down from its than six-year high to 5.7 percent. After this positive round of data, the modest doubt for a follow up rate hike that had developed over the past few days was completely banished. The market is now pricing in a 99 percent probability of a 25bps hike on November 2nd. However, the Aussie currency has covered a lot of ground and quickly these past few weeks considering it has already been deemed the strongest performer among the majors. It is now running the risk of overextending itself.
Canadian Dollar has a Busy Day Ahead of it with Employment, Trade and Business Activity Data
The Canadian dollar will get the chance to top the list for fundamental event risk Friday. A heavy round of releases will be paced by the September employment data. A modest increase in net jobs is expected but the unemployment rate is also expected to tick higher to a fresh 11-year high of 8.8 percent. In the same breach, the 3Q sales from the BoC is expected to step back from its sudden surge last quarter; and the senior loan officer survey for the same time and from the same group is likely to produce equally limited results. Today, BoC member Paul Jenkins tried to say Canada is very different than Australia despite the currencies correlation; but will the market head this bit of wisdom?
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Written by: John Kicklighter, Currency Strategist for DailyFX.com