FOREX: Dollar Doesn’t Open to Armageddon, Just Building Fear

25 Jul

Posted by: Bethany Colton in: Forex News

Dollar Doesn’t Open to Armageddon, Just Building Fear
British Pound Readies for the First Major Market-Mover in Weeks: GDP
Euro Traders Show Little Interest in Another Greek Downgrade
Japanese Yen: Noda Unaware of Sudden Tumble in Currency
Australian Dollar Weighing Risk Appetite Trends Versus Rate Outlook
New Zealand Traders Should Prepare for an RBNZ Disappointment
Gold Gaps to a Record High to Start the Week as Deficit Talks Break Down

Dollar Doesn’t Open to Armageddon, Just Building Fear

Experienced FX traders should know better than taking politicians’ forecasts for the markets seriously. Over the weekend, US officials were warning that the absence of a meaningful plan for the nation’s deficit would generate a market panic that would rival the flash crash or even the Lehman Brothers failure. That was either fear mongering or misinformation by an economic advisor; but the dollar would take a hit through the opening trading session for the period. Deficit concerns are still weighing heavy on the market’s mind; but few are willing to bet against the sanctity of the Treasury’s position a stable backdrop just yet. Looking at the US capital market’s response to the uncertainty, the S&P 500 opened sharply lower (down a little more than 1 percent through the opening thrust); but subsequently spent the remainder of the session trading within the opening move’s range. And gauging the market’s direct interest in US government bonds, the two-year note slipped to its lowest level in two weeks to 99-29. Taking the biggest hit, the dollar (ticker = USDollar) banished speculation that it would hold at the 9450 support from early June and slipped to lows last seen since May 5th.

We have plenty of scheduled event risk this week for the dollar; but it is all a mere distraction from the bigger fundamental theme – and traders recognize that fact. Our primary focus will be the US deficit impasse as long as it stands unresolved. As we count one day closer to the August 2nd deadline; we note that President Barack Obama offered another public address after a failed day of negotiations and House Speaker John Boehner quickly followed with his own statement. There are essentially two major plans that are being floated; but neither has the traction necessary to pass both houses of Congress. On the one hand, we have a two-staged plan that was presented by House Republicans where a $1 trillion debt limit increase would come along with a $1.2 trillion in discretionary caps over 10 years. From there, a second $1.6 trillion debt limit increase would be allowed if certain reforms are implemented; and that group would present a plan for a $1.8 trillion in cuts over 10 years. Another popular alternative comes from the Senate Democrats that would total $2.7 billion in spending cuts (with interesting accounting rules used to account for savings) and a $2.4 trillion jump in the deficit. As we close in on the August 2nd expiration of the Treasury’s temporary efforts measures to cover the deficit; the market will become increasingly unstable. This isn’t a wise matter to ‘play chicken’ on.

The market is so engrossed in the dollar’s wavering title as the world’s reserve currency; that traders cannot afford to pay much attention to regularly-scheduled event risk. Nevertheless, we should still take note of the listings on the docket as they will help steer the sheep after the there is a clear-cut outcome for the financial crisis. The S&P / Case-Shiller home price data and New Home Sales figures are good sector readings while the Consumer Confidence report is a leading consumption report. Also worth following: the UK GPD figures.

Related:Discuss the Dollar in the DailyFX Forum, John’s Dollar Outlook: Traders Talk Debt, Euro and Risk Trends

British Pound Readies for the First Major Market-Mover in Weeks: GDP

There are few underlying fundamental themes (much less individual indicators) that can drive the British pound to a meaningful move. Having discounted all interest rate potential for the foreseeable future and engaged in a drawn out balance between growth and austerity, the sterling is essentially in a state of wait-and-see. However, when there are meaningful updates to the implications of the stressful stimulus withdrawal; the market pays attention because it can threaten a quick dip back into recession and/or a monetary policy response from the BoE. As such, the 2Q GDP figures due tomorrow carry significant weight. To truly move the markets, we will need to see a meaningful surprise – not very likely.

Euro Traders Show Little Interest in Another Greek Downgrade

We had yet another downgrade for the European Union’s most troubled member: Greece. However, the euro showed little concern that Moody’s lowered the nation’s sovereign rating to its lowest level (Ca) and said a default was “virtually” assured. This surprises no one considering Standard & Poor’s and Fitch have already moved to equivalent ratings. The markets are more concerned about contagion at this point.

Japanese Yen: Noda Unaware of Sudden Tumble in Currency

Though it was a relatively temperate move in respect to historical volatility levels, USDJPY marked a dramatic 80 point rally in the span of a few minutes where price action before it was carving out far more restrained swings in the hours and days before. The market’s first inclination is to think intervention. However, Finance Minister Noda – who has said he is watching FX very closely – said he was unaware of the move.

Australian Dollar Weighing Risk Appetite Trends Versus Rate Outlook

The Australian dollar is ‘quite high’, so says RBA Governor Glenn Stevens. The country’s head central banker may believe that to be the case; but there is little he will do on a policy basis to correct this inequity. At this pass, the most influential element to the dollar’s future is speculative expectations. With the PPI figures that opened the week, kept rate expectations steady; but it is the CPI data due ahead that really matters.

New Zealand Traders Should Prepare for an RBNZ Disappointment

We are quickly approaching the RBNZ’s decision on monetary policy. Few doubt the outcome of this meeting (a hold on the benchmark lending rate); but there is clearly a lot of bullish speculation built up behind the kiwi. The currency is currently pushing record highs against many currencies; and the higher it goes, the less stable the situation. Should Governor Bollard say a cut is possible, there is a long way to fall.

Gold Gaps to a Record High to Start the Week as Deficit Talks Break Down

Where the S&P 500 gapped down to open the week, gold would do exactly the opposite – jumping to record highs after clear a week’s worth of congestion. However, we shouldn’t necessarily link the metal’s gains to risk aversion. Rather, with each step taken closer to a financial and fiscal disaster in the US: market participants want to distance themselves as much as possible to a devolving situation.

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