US Dollar Delays a Renewed Bear Trend After Bernanke Commentary, CIT Warnings

• US Dollar Delays a Renewed Bear Trend After Bernanke Commentary, CIT Warnings
• British Pound Eases as Deficits Balloon and Rate Watchers Look Ahead to Tomorrow’s Minutes
• Canadian Dollar Not Supported by the BoC’s Improved Outlook for Long
• Australian Dollar Balancing Risk Appetite with Economic Considerations

US Dollar Delays a Renewed Bear Trend After Bernanke Commentary, CIT Warnings

A quick glance at the dollar index tells us how close the benchmark currency is to a dramatic shift in trend. The greenback has produced a generally, bearish bias for the past two weeks now; but the stakes have not yet been as high as they are now. Resistance is set in a rising trendline that spans this entire year and further finds a complement swing low in the early June swing low at 78.35. The same tension is unmistakable among the majors. EURUSD is eying seven-month highs above 1.4340, a typical GBPUSD daily range could drive the pair above 1.60 and NZDUSD has already tested nine-month highs before pulling back into the late US session. The scene is set; and fundamental market participants are eagerly awaiting direction on a breakout or reversal. What could set the market’s potential energy into motion; and could we really be on the cusp of aca new trend after nearly two months of congestion?

Today’s price action was notable in that it broke pace with Monday’s anti-dollar and subsequently deflated a what could have been an aggressive breakout. This does not mean the market has been automatically consigned to a reversal; but it gives dollar bulls a fighting chance to regain control of their currency. Event risk helped the dollar regain its footing. Considering both the greenback and Japanese yen were stabilizing, it was clear that risk appetite was sidelined. The sigh of relief breathed after yesterday’s announcement that a privately funded rescue of troubled commercial lender CIT seems to have been released too early. In a regulatory filing today, the lender its existing liquidity would not cover the repayment of a $1 billion round of debt maturing on August 17th. At the same time, the bombastic earnings data that kicked the season off last week has lost its consistency. While blue chips Caterpillar, Apple and Merck beat their respective forecasts; Stress Test banks Regions Financial and State Street, along with DuPont, Coca-Cola and United Technologies missed their benchmarks. To truly recharge a bullish trend, the outlook for returns (and indirectly broader growth) may need to be far stronger than what today’s results have shown.

And, though the dollar has undoubtedly deferred to risk trends to reach its current lows; it is clear that FOMC Chairman Ben Bernanke’s commentary helped prevent the next stage of the dollar’s plummet. Delivering his semiannual Monetary Policy report to the House Financial Services Committee, the central banker maintained his cautious yet optimistic outlook for the US. A perfect summary for his statement can be found in his comments that there are “tentative signs of stabilization,” yet “monetary policy remains focused on fostering economic recovery.” The most profound take away from this event is Bernanke’s calls for beginning work towards reducing the nation’s deficit. This may fall on deaf ears among the ranks of politicians; but confidence from the Fed Chairman that an economic recovery can be sustained while working off the nation’s debt load hints at strength that many speculators or market commentators have did not expect. Tomorrow, Bernanke will sit in for round two with the Senate; but there is unlikely to be any substantial changes from today’s script.

British Pound Eases as Deficits Balloon and Rate Watchers Look Ahead to Tomorrow’s Minutes

There were few economic releases from the UK’s docket this morning; and yet the sterling was lower across the board. This can partially be accounted for through the shift in risk appetite from the previous session; but it is a move that would also have its grounding in more tangible fundamental sources. From the economic docket this morning, the Office for National Statistics reported a 13 billion pound budget deficit for the month of June – the most for that particular month on records going back to 1993. With the recession ravaging tax revenues, the government is running out of options to funding its burgeoning debt load. Not long ago, Standard & Poor’s downgraded its outlook for the nation’s credit rating as debt forecasts grew closer and closer to 100 percent of GDP. In other news, the FSA reported that it had used much a much gentler stress test for UK insurers than it did for the nation’s banks. With the assumption that property prices would fall only 15 percent this year (in line with a decline of the same magnitude as the 1980’s), a ‘V’-shaped recovery would seem plausible. Under more realistic assumptions, more troubles could be in store. Fundamental traders will find more data to work with tomorrow with the BoE’s meeting minutes and 2Q CBI factory report.

Canadian Dollar Not Supported by the BoC’s Improved Outlook for Long

Aside from Bernanke’s testimony in Washington; the Bank of Canada’s rate decision in the early North American session held the greatest potential for market movement. While there was little chance that the policy group would lower the benchmark rate further from its record 0.25 percent (as they would likely see little economic benefit from such a move), the statement could be riddled with speculative cues – and in fact it was. In the statement, Governor Mark Carney and his fellow central bankers raised their forecasts for growth. For the current year, the expected slump was revised down from 3.0 to 2.3 percent. Further out, the 2.5 percent growth projected for 2010 was lifted to 3.0 percent. These growth projections would have left the statement with a bullish tinge if it were not for the moderation is 2011 expansion forecasts, confirming rates would not likely be changed until June of 2010 and suggesting the currency’s stubborn appreciation was undermining growth. Tomorrow, fundamental control will be extended by May retail sales figures (seen rising 0.5 percent) before the Quarterly Monetary Policy report is release Thursday.

Australian Dollar Balance Risk Appetite with Burgeoning Docket

With the highest benchmark lending rate among the majors and considerable exposure to the health of the global markets, there is little doubt that the Australian dollar is looking to from risk appetite for guidance on direction. However, this does not mean scheduled, economic data is consequently being ignored. This morning the RBA released the minutes from its July 7th meeting. Consistent with what their previous commentary had concluded, the commentary stated that the current means of policy would foster “sustainable growth and low inflation.” It is perhaps notable that the minutes further suggested that efforts to this point to support demand were working better than expected. We will see if tomorrow’s CPI data doesn’t offset this appraisal somewhat. Headline inflation is expected to drop from 2.5 to 1.5 percent in the second quarter.

Related Article: How Will Australian CPI Impact the Aussie Dollar?

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