The entire currency market was working with high volatility Thursday; but it was the dollar that would see some of the most significant moves for price action.
EURUSD rallied once again to within sight of the March swing high at 1.3735 before plummeting. Against the pound, the greenback would produce a similar intraday reversal that would ultimately span 250 points. However, showing the true drive behind the market, the market’s activity level would increase progressively with the pair’s relation to risk appetite. The dollar saw its biggest advance come against the New Zealand, Australian and Canadian dollars (which were 2.3, 1.5 and 1 percent respectively). However, the pair that would confirm this was a shift in sentiment rather than a specific pick up in US economic prospects was the fourth consecutive decline in USDJPY, pulling it below 96.
Looking back over the past 24 hours, there were no all-consuming economic events to drive such a clear shift in risk appetite. So, where did the impetus for this broad move come from? Realistically, the tempering of risk appetite (and subsequent rise in the dollar’s appeal) is an ongoing deflation of the optimism that has been artificially inflated over the past few months. Traders have been jumping into the higher risk pool of yield-bearing assets on the belief that sentiment will be able to sustain itself and that fundamentals will catch up in time to put a floor underneath the market before things started to fall apart. However, after last week’s heavy dose of reality, there is reason to worry that sentiment may fall apart well before the eventual recovery ever picks up steam. From growth prospects, we are still dealing with the worst GDP numbers in a quarter of a century and unemployment threatening to top double digits. Fear could really take over should market stability come under pressure. Though the market’s initial reaction to the Fed Stress Test results last week seemed to be that of relief; the possibility that the government was too accommodative in accounting for risk while not reasonably preparing for the impact of rising loan defaults has loomed over the market. Should there be any signs that banks are struggling to raise capital without government help, fear will be soon to follow.
Aside from the fickle path of sentiment, scheduled and unscheduled economic data was tempering speculation that the US would be the first major economy to see a true recovery. Topping the docket this morning, the Advanced Retail Sales report for April crossed the wires worse than expected with a 0.4 percent contraction. Dampening the market’s reaction though, this decline is relatively modest when taken into historical context. More potent was the rise in foreclosures measured by RealtyTrac Inc. According to the company’s statistics, defaults hit a record high for a second time in April with one in every 374 households going under. Forecasting the influence of fundamentals on volatility going forward, the US calendar is relatively light Thursday with jobless claims and producer prices the only notable indicators.