US Dollar and Japanese Yen Hold Support While the Dow Soars

• US Dollar and Japanese Yen Hold Support While the Dow Soars
• British Pound May Finally Find Direction for Volatility with Friday’s 1Q GDP Release
• Euro May Respond to its Own Growth Readings in Leading PMI Reports
• Canadian Dollar Surges Higher After BoC Policy Report Forces Resistance

US Dollar and Japanese Yen Hold Support While the Dow Soars

After a nerve-racking week, the broader markets finally took their defining step with a sharp rally that drove the Dow Jones Industrial Average above 9,000 to its highest levels for the year. Commodities and fixed income would follow suit with significant advances of their own; but there was a notable discrepancy in this seemingly market-wide bull wave from the currency market. While the more traditional asset classes were spurred to new highs, the dollar was able to hold support. The defining boundaries keeping the greenback from setting its own 2009 highs are 1.4340 and 1.6600 for EURUSD and GBPUSD respectively. Now, we come to a crossroads where the benchmark currency is stalled while capital markets have instituted the next wave of medium-term bull trend. While the correlations between these different securities can fluctuate, it is unlikely that they would completely break when risk appetite is still a fundamental ingredient to the broader health of financial markets and economic growth. The means that one of these juxtaposed factions will inevitable concede; but which one?

Looking for the catalyst behind today’s rally, the general consensus is that another round of earnings released in the early US session drove stocks beyond their psychological milestone. Among those companies releasing their accounting figures, McDonald’s, AT&T and Fifth Third all beat analysts’ expectations before the market opened in New York. We haven’t seen such a consistent round of strong earnings from key corporations (two Dow members and a Stress Test bank) since bullish sentiment set in with the Goldman Sachs release. Along with a better than expected 3.6 percent increase in US June existing home sales, fundamentals seemed to fuel sentiment by offering confirmation that the US and global economies were recovering faster than policy officials were expecting. It may have been the direct implications of the housing data that tempered the influences of risk appetite; but the dollar was able to maintain its standing until the close of regular US session. After the exchanges closed for the day though, risk appetite took an abrupt turn and the dollar managed a late rally that allowed it to close significantly higher for the day. The reason for this dramatic shift: earnings, naturally. It seems all the positive data was scheduled for the morning; and all the disappointing news was left for after the close. American Express, Capital One Financial and Microsoft (two Stress Test banks and a Dow member) would all disappoint.

So, what market will take the lead tomorrow? Will equities maintain the pressure until the dollar gives or have stocks overshot fundamentals? Since there is only the revision of the University of Michigan Consumer Confidence survey due tomorrow, the answer will almost certainly be found through more elemental themes. For risk appetite, the earnings effect will have to run on momentum alone as most of the conglomerates have already reported and there are certainly no pivotal companies due to announce their numbers tomorrow. This would suggest it is the stock market that will fall in line (which is not difficult to envisage considering most of the commodity and fixed income markets haven’t pushed through any of their own breakers. However, risk appetite can still be fed and the dollar still break should another driver carry the torch. Growth speculation may fill this role. The UK GDP numbers are due tomorrow and the United States own data will cross the wires next Friday.

Related Article: Risk Appetite Hits New Highs but Currencies Hold Back

British Pound May Finally Find Direction for Volatility with Friday’s 1Q GDP Release

With risk appetite holding firm control over market activity Thursday, the British data crossing the wires was largely ignored. The simultaneous release of retail sales and BBA loans for home purchases – both for June – offered a last minute boost to the pound’s fundamental lean. Despite rising unemployment and sliding wage growth, spending at retailers rose 1.2 percent last month and grew 2.9 percent (the biggest increase since December) from the same period a year ago. For such a volatile data series, the statistics were otherwise overlooked. The housing data would have a little more profound implications. A gauge of both growth and credit availability, mortgage applications jumped to 35,235, the highest level since March of 2008. Now, we look ahead to tomorrow; and the sterling looks to play a much greater role in the larger direction of the markets than it has played in quite some time. Due at 8:30 GMT, the first reading of 2Q GDP can define expectations for the pace of recovery for the entire industrialized world. While a deeper, 5.2 percent annual contraction would be troubling, it is the quarterly reading that will likely drive markets. Against expectations of a modest 0.3 percent drop through the three-month period, positive growth could actually spark speculation that the nation is recovering faster than officials expected, which would bode well for the rest of the world.

Related Article: As Top Scheduled Event Risk this Week, UK GDP Now Steps in to decide GBPUSD’s Fate

Euro May Respond to its Own Growth Readings in Leading PMI Reports

As risk appetite loses its earnings fuel, euro fundamentals may step in to determine the direction on EURUSD on its own. News from the region today was mixed with the current account balance rising to 15 month high and the European Union warning it may put banks rescued by governments into forced sales. Tomorrow, event risk will be more immediate and straight forward. The German IFO business sentiment survey for July will offer guidance on the economic outlook from a critical market consistent; but it is the PMI data that will have greater impact. With advanced readings on service and manufacturing activity from major member economies and the entire Euro Zone itself for the month of July, this data will provide a leading gauge of growth – particularly important with the European quarterly GDP numbers not due until August 13th.

Canadian Dollar Surges Higher After BoC Policy Report Forces Resistance

The Canadian dollar was the exception to the rule Thursday. While most of the other majors held to ranges or had significant runs cut off; the loonie marked a rally that catalyzed into a significant breakout. This advance was sparked by the Bank of Canada’s quarterly Monetary Policy Report. This was unexpected considering the central bank covered everything after Tuesday’s rate decision. However, the suggestion that the country’s recession would end this quarter - among other things - triggered sentiment that seemed to be held dormant until today.

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Written by: John Kicklighter, Currency Strategist for
E-mail: <[email protected]>