• Dollar Stabilized by Tempered Risk Trends, Bolstered by Bernanke’s Hawkish Commentary
• Euro’s Strength Diminished by Doubt over the Extent of the Greek Bailout Effort
• British Pound Slides after BoE Quarterly Inflation Report Unexpectedly Maintains a Dovish Tack
• Australian Dollar Looks to Reestablish Interest Rate Speculation Premium
Dollar Stabilized by Tempered Risk Trends, Bolstered by Bernanke’s Hawkish Commentary
The dollar would pass through a series of phases Wednesday as risk appetite evolved. Still reeling from the sharp rally in risk appetite yesterday (a serious weight for the market’s favored safe haven currency), the greenback found a clear sense of stability through the overnight session as market participants reevaluated the possibilities for a Greek bailout. This is not to mean the market’s interests in this region’s stability have diminished. In fact, the focus on this specific affair has likely intensified considering officials’ postponement of a clear plan until tomorrow would stabilize most asset classes. Looking ahead to the resolution of this looming episode, there is likely no scenario in which risk appetite will come out unscathed. A cursory appreciation of this event presents to scenarios. The European authorities could extend support that falls short of what the market believes is necessary to prevent a Greek default and risk aversion will take root once again. Alternatively, officials can extend a sufficient plan that tempers fears of broader financial shockwaves. However, these are just surface appraisals of the situation. In truth, investor sentiment was deteriorating well before the EU troubles came to prominence. Realistically, it was the underlying reversal in risk appetite that set the market on to this specific threat rather than the other way around. And, when we come to this understanding, it is perhaps easier to appreciate the possibility that putting out this one fire will not prevent a bearish crowd from sparking the next one.
Turning from the vagaries of risk appetite to the tangible influence of scheduled and exogenous event risk; dollar traders had more than enough to work with today. On the docket, there were a few notable indicators to absorb. The December trade balance was the most recognizable report. According to the Commerce Department, the deficit of goods and services ballooned to $40.2 billion – the largest gap in a year. Looking at the details, the discouraging elements of the headline reading were somewhat absolved by the fact that exports rose 3.3 percent to a 14-month high. A 4.8 percent increase in imports would offset this figure; but altogether, the foreign and domestic demand this data implies is a bullish sign. Another release to take note of is Bloomberg’s Global Confidence survey for February. A measure of sentiment among market professionals, the pull back from the previous month’s record high (this series only goes back a few years) reflects the concern over Greece, a slow global recovery, and the global withdrawal of stimulus among other things. More interesting for currency traders was the component reading that suggested the group was the most bullish on the dollar since November of 2008. All this data aside though, the real fundamental interest for the greenback rested with Fed Chairman Bernanke’s remarks to the House Financial Services Committee. While the central banker would repeat his warning that low rates were necessary for an “extended period,” he also suggested meaningful and hawkish steps were on the way. The highlight from his statement was the suggestion that the Fed may opt to lift the discount rate ‘before long.’ While this is not the Fed Funds rate and Bernanke himself would say this wouldn’t alter their policy outlook; it is nonetheless a tangible step towards tightening. What’s more, he would said the bank may use interest rates on excess reserves as a guide rather than the usual benchmark rate for a while.
Related: Discuss the US Dollar in the DailyFX Forum, Dollar Bolstered by Carry Unwinding and the Specter of Rate Hikes
Euro’s Strength Diminished by Doubt over the Extent of the Greek Bailout Effort
Euro trades (and the entire market) are holding their collective breath to see what sort of rescue is in store for Greece. While speculation has evolved into unofficial statements that both German and the European Union are discussing options, investors are looking for something concrete on which to establish their level of confidence. The EU is scheduled to meet tomorrow; but the conjecture for what officials will offer is mixed. A certain answer to this economy’s financial troubles would be a direct and sizable loan. However, that would bring with it moral hazard and open the flood gates to other members demanding assistance. The more realistic offering would be a guarantees on loans (which lawmakers in Germany as supposedly mulling as well); but it remains to be seen whether that will defeat market participants’ and lenders’ fears. Officials have repeatedly attempted to reassure the markets that Greece could meet the objective for cutting its deficit given the chance. However, as long as doubt lingers and market’s recede, the costs for accomplishing this task become insurmountable. And, though Moody’s said that Greece should not be grouped with Spain and Portugal because it has “material challenges,” the reality of speculative markets is that irrational fear can develop around any struggling EU country given the right conditions.
Related: Discuss the Euro in the DailyFX Forum, Euro on the Ropes as Greece Debt Crisis Grows Contagious
British Pound Slides after BoE Quarterly Inflation Report Unexpectedly Maintains a Dovish Tack
There was plenty of fundamental activity for the British pound Thursday; but the market’s real focus would be on the Bank of England’s Quarterly Inflation Report. Considering the central bank held its meeting only a short time ago (and subsequently paused their bond purchases for the first time since its inception), expectations were limited for what more could be said in this report. However, this event would prove far more bearish than most had expected. For the group’s economic forecasts, growth through 2011 was revised down from a 4.0 percent pace to 3.2 percent while inflation was expected to hold well below the 2.0 percent target after briefly jumping to 3.3 percent. The real discouragement however would come from Governor King’s suggestion that it was “far too soon” to tell whether further bond purchases would no longer be needed. This single report would easily offset the positive readings in the industrial production and NIESR GDP estimate figures.
Related: Discuss the British Pound in the DailyFX Forum
Australian Dollar Looks to Reestablish Interest Rate Speculation Premium
Through much of the early morning of Wednesday’s session, the Australian dollar was under fundamental pressure. Not only was risk appetite sidelined; but consumer confidence and home loan figures had both released discouraging figures. However, the employment data that was released in the early Asian hours of Thursday’s session would fully compensate for that. Aussie employers reportedly added 52,700 workers to the payrolls (more than three times the forecast) and the jobless rate dropped 0.2 percent to 5.3 percent. Maybe nearby hikes aren’t farfetched.
Related: Discuss the Australian and New Zealand dollars in the DailyFX Forum
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Written by: John Kicklighter, Currency Strategist for DailyFX.com
E-mail: <[email protected]>