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• US Dollar Hits a New Low for the Year but do Fundamentals Support a Bear Trend?
• Euro Bolstered by German Trade Data, ECB Weber's Measured Policy Approach
• British Pound Finds Little Support from Pickup in Growth Forecasts, Factory Activity
• New Zealand Dollar's Run May be Cut Short by RBNZ Rate Decision
US Dollar Hits a New Low for the Year but do Fundamentals Support a Bear Trend?
It was an exciting return to the market for American traders coming back from the extended holiday. The influx of liquidity was met with (if it did not in fact spark) a crucial plunge from the US dollar. On a trade-weighted basis, the greenback suffered its steepest loss since the first day of August and subsequently closed at lows not seen since last September of last year. Alone, this would support the notion that the dollar has initiated the next leg of its medium-term bear trend; but there is still reason to be cautious and skeptical. From price action alone EURUSD, USDCHF, AUDUSD and NZDUSD have all forced dollar-related support. In contrast, whereas the pound, Canadian dollar and Japanese yen have gained ground against the world's most liquid currency; they have not yet established the same progress.
The fundamentals behind this tentative shift offer more details and thereby give a better sense of its development. Pressure has built up against the greenback for months; so this move is not without its merit. Among the short-term factors that contributed to today's move, the World Economic Forum (best known as the host for the annual meeting in Davos, Switzerland) released a report that supplanted the US as the most competitive economy in the world with Switzerland. Further readings put the country at 108th for trust in banks, 106th for access to financing and 93rd for economic stability (out of 133 participants). From the economic docket, the Federal Reserve reported the biggest drop in consumer credit on record. The $21.6 billion decline through June marks the sixth monthly decline and extends the worst trend since 1991. Both a reflection of credit restrictions and lack of demand, this report significantly diminishes the outlook for a recovery - as the consumer is the largest component of growth by a wide margin.
What is needed to maintain true dollar depreciation beyond its already-low levels though is the long-term fundamental outlook. This past weekend's G20 meeting should not be written off for influence today. US market participants no doubt responded to the suggestion that policy officials are coming closer to an appropriate time to withdrawal monetary and fiscal stimulus. And, though there is a desire to make this shift a coordinated one, it is clear that there will be leaders and laggards - with the United States falling into the latter category. Other concerns include the slow efforts to replace the dollar as the world's reserve currency and the fact that the country will have to float record-breaking deficits well after the recovery is underway as paying off the debt will be a timely process in itself. However, these are not particularly novel concerns. Indeed, these are realities that have long been factored in. What we need to know to determine the trend is whether the outlook for risk appetite is strong enough that investors have the luxury to focus on these vague concerns (remember most of the developed world is in the same situation as the US). If this is the case, we should expect investor sentiment to advance uniformly and unequivocally over the coming weeks.
Euro Bolstered by German Trade Data, ECB Weber's Measured Policy Approach
As the accepted alternative to the US dollar, the euro naturally benefited from today's dollar breakdown. However, the currency was finding strength on its own terms as well. From the economic docket, a round of data offered a mixed view of short-term fundamentals. German factory activity through July expectedly contracted 0.9 percent; but a positive revision for the previous month also established the first, two-month period of expansion for this battered sector since the start of 2008. Far more conducive to the bullish trajectory the currency would take though was the German trade number. The largest exporter in the world by recent accounts, the 13.9 billion euro, nine-month high physical trade surplus establishes a critical source of growth and demand. Moving from the neat confines of the economic calendar, the region seems to be retaining its leadership role in the global recovery. ECB council member Axel Weber took the line other policy officials have laid out by saying in a statement today that current rates are appropriate and that positive growth may be protracted. Yet, he further mentioned that he sees no threat of credit problems in the Euro region and that it would be wise to act upon inflation pressures before they emerge. Subtle musings from an avowed hawk.
British Pound Finds Little Support from Pickup in Growth Forecasts, Factory Activity
Considering the deeper than expected recession measured through second quarter GDP figures and the dour forecasts from British policy officials, independent economic groups and economists; it seems unnatural that the pound would advance on data. Nonetheless, rally the currency did and largely due to economic indicators. The past London session held two notable readings: the industrial production readings for July and NIESR GDP report for August. Factory activity grew a greater than expected 0.5 percent through the period; but the real impression for the indicator was that this was the first back-to-back improvement since the September of 2006. The NIESR growth estimate doesn't typically take on the mantel of market mover; but given the first positive reading in 14 months (suggesting growth in the quarter through August), we are reminded that few economies stand to benefit more from a global recovery than the UK.
New Zealand Dollar's Run May be Cut Short by RBNZ Rate Decision
There is little doubt that the New Zealand dollar's rally against the greenback can largely be contributed to the plunge of the latter (just look at the kiwi crosses); but we will likely see the currency take up its own trend tomorrow. The RBNZ rate decision is scheduled for release late Wednesday afternoon in the US session; and the event has clear market potential. While the benchmark rate is heavily expected to be held at 2.50 percent; there is a good chance that Governor Alan Bollard will offer comments that set the scene for the next policy shift and benchmark growth forecasts. The central banker has maintained his dovish penchant in recent statements; but talk of a global recovery will turn the tides.
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Written by: John Kicklighter, Currency Strategist for DailyFX.com