US Dollar, Japanese Yen on Edge of Bearish Breakouts as Risk Appetite Rises

• US Dollar, Japanese Yen on Edge of Bearish Breakouts as Risk Appetite Rises
• Euro: Germany Officials Suggest Economy at the Forefront of the Global Recovery
• British Pound Bolstered by Risk Appetite, Housing Data
• Canadian Dollar Backs off its Rally Just Ahead of the BoC’s Rate Decision

US Dollar, Japanese Yen on Edge of Bearish Breakouts as Risk Appetite Rises
The benchmark dollar plunged against all its major counterparts Monday as the market found a catalyst for risk appetite in what could be a temporary solution to US-based commercial lender CIT’s impending debt default and bankruptcy. Indeed, we can see that most currencies (and asset classes for that matter) responded to the shift in optimism as would be expected. The Japanese yen was down against every one of its major counterparts except the US dollar which it consequently marked a modest 0.01 percent gain against. This shift in risk appetite is tangible; but the true break has not yet been confirmed. In the FX world, we see EURUSD has pushed through 1.4175; but June’s highs of 1.4330 still stand. At the same time, the Dow has advanced for its sixth consecutive session; yet the benchmark is still conspicuously below the six-month highs set early last month. Momentum is still on the bulls’ side; but a catalyst will be needed to take it to that next, psychological step.

It should not be hard to qualify a true break out against the US dollar and perhaps even the development of a significant bear trend. This is specifically the case because the currency is at present clearly linked to risk trends. Therefore, should the greenback merely break lower on only a few pairs without confirmation from its less, risk-sensitive crosses or from other markets; it is likely a speculative move that could quickly fade into a reversal. In looking for the fuel for optimism, we should look to the same sources that have brought us to this point. First things first, fear that CIT could still go under is a significant hurdle for financial markets. Since the Treasury rebuffed the firm for a second round of bailout money last week, bondholders have been working on a rescue of their own that could total $3 billion. It has been estimated that this firm has $10 billion in maturing debt over the coming year; but for risk appetite, only the immediate stability of the financial system is a concern. To upgrade from a passive to active advance in risk sentiment, the earnings calendar could once again step in for drive. Among the companies expected to report tomorrow are Regions Financial Corp (one of the 19 Stress Test banks), Caterpillar, DuPont, Merck, United Technologies, Coca-Cola and Apple. Most of these are blue chips and therefore important; but we may need consistency and surprises to revive such an all-encompassing trend.

As for data, the US docket is relatively light. Today, all dollar traders had to work with was the leading indicators composite index for June. While this indicator has shown some predictive abilities in the past, it is still has little impact on price action. It should be noted, however, that the 0.7 percent pickup through June marked the first time we have seen three consecutive improvements from this series since the second quarter of 2004. Looking ahead to tomorrow, Fed Chairman Bernanke’s monetary policy report to the House could bring speculation to life. Last week’s Fed minutes offered economic forecasts that projected a sharp reduction in the pace of recession through the second quarter (an important reading with the official GDP numbers due next week) and the first cautious steps towards rolling back financial aid. As the global economy progresses in its recovery, market participants will become more discriminating as to which economies are leading and which are lagging the turn around. The market will no doubt scan his comments and answers with a fine-toothed comb to discover a fundamental bias.

Related Article: Dollar May Soon be Forced into a Breakout, Risk Appetite Torn Between Earnings and Credit Fears

Euro: Germany Officials Suggest Economy at the Forefront of the Global Recovery
Europe’s largest economy is on track to see a sharp reversal in economic activity and is not in the position to require banks to increase capital levels – according to German officials, that is. The market has been treating the euro as the leader of the economic recovery among the majors through the actions of Euro Zone policy makers. With the ECB putting a stopper in interest rate cuts at 1.00 percent, credit markets responding positively to the covered bond purchasing program it implementation and certain finance ministers signaling their intentions to start reducing deficits soon ahead of their counterparts; all the components seem to be in place for confirmation from objective data of positive growth. More than three weeks before the official data hits the wires, the Bundebank reported in its monthly bulletin that the German economy contracted “only slightly” in the three months through June after seeing a record contraction in the first quarter. There is no official consensus among economists as to the hard number due August 13t; but their forecasts are already outpacing the IMF’s projections. Another notable German report was released by the Finance Ministry in which the group dismissed a report ran in a local newspaper suggesting the government is mulling over a forced capitalization plan that is reminiscent of the US Stress Test to prevent a credit crisis later in the year.

British Pound Bolstered by Risk Appetite, Housing Data
In a global economic recovery, which of the majors stands to reap the most benefit? It could be argued that exporters would find more demand while financially dependent economies can work down deficits. However, if the United Kingdom were to begin a recovery from its worst recession and financial crunch since WWII, the country could shed the IMF’s forecasts that it is on pace to be the worst performing economy in the industrialized world and potentially start working down the excessive levels of government and private debt that still plague the country. The steady improvement in housing prices as reported by the Rightmove index keeps this trend going; but real confirmation will come with Friday’s 2Q GDP number approaches. This indicator is no doubt the most market-moving even this week, so speculation will only intensify with time.

Canadian Dollar Backs off its Rally Just Ahead of the BoC’s Rate Decision
Reports showing a smaller than expected contraction in wholesale sales (0.3 percent) and the largest monthly influx of investment capital in five years (C$18.9 billion) provided a boost to the loonie this morning. However, the market would not be able to maintain this pace later into the session as traders started to batten down the hatches for tomorrow’s BoC rate decision. There is nowhere to further cut rates; but policy officials have been exceedingly bearish in recent months. Look for elaboration on the last meeting’s determination that Canada’s recession is as bad as the one in the United States; but real forecasts and policy will likely be held until Thursday when the quarterly Monetary Policy Report is due.

Related Article: How Will The BoC’s Rate Decision Effect The Market, Watch This Event Live!

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