FX - Dollar Finds No Comfort in Durable Goods Data or a Sharp Drop in Equities

• Dollar Finds No Comfort in Durable Goods Data or a Sharp Drop in Equities
• Euro Contradicts Risk Trends and Ignores Financial Troubles for Second Consecutive Advance
• British Pound Unable to Overtake 1.50 against Dollar on Cautionary BoE Financial Report
• Japanese Yen Enjoys Risk Aversion from a Funding Perspective, Deflation Eases
• New Zealand Dollar Can’t Catch a Break as Interest Rate Forecasts Hit a 9 Month Low
 

Dollar Finds No Comfort in Durable Goods Data or a Sharp Drop in Equities
It was an interesting day for currencies and the capital markets in general. If you were an equities trader, you would reflect on a particularly volatile day that would see the French CAC 40 lead European shares into a deep decline with a 2.4 percent loss while the S&P 500 took charge of the US session with its own 1.7 percent decline. This is a substantial performance for this particular market because not only was it was an active session; but it was also the fourth consecutive decline on this week. Such a trend is almost certainly going to be labeled a strong sign of risk aversion; yet it may be jumping the gun to draw this conclusion. Looking at other markets, we do not see the same a similar level of conviction or even an equivalent direction to support a market-wide shift in investor sentiment. One of the more prominent divergences for FX traders was in the performance of the US dollar. The trade-weighted Dollar Index actually slipped for the second session and its performance against the euro in particular was surprising. Not only is the greenback the favored safe haven amongst currency traders; but the euro itself has shown a clear proclivity to stumble when risk appetite slips. Nonetheless, EURUSD extends its climb. On the other hand, the dollar would put in for a particularly strong drive against the commodity bloc. What does this tell us? Speculative interests were in flux; and those pairs with an acute sensitivity to risk trends (wide yield differentials) were responsive to it. At the same time, there wasn’t a major shift in the health of the underlying financial market; and pairs that are more responsive to fundamental measures would await the next astonishing headline.

From a speculative point of view, the day’s scheduled and unscheduled event risk was not influential enough to drum up conviction behind underlying investor confidence; but there was still a round of news that has further shifted the balance between recovery and renewed crisis. A favored topic nowadays, the European Union’s troubles were brought back into focus as Greek credit default swaps and 10-year bond yields swelled (the former to a record). This particular member is the weakest performer in the group; but the EU/IMF lifeline extended to the government has bought time. Time may not be the answer though as other economies are seeing their own financing costs rise to unsustainable levels. There is no magic level whereby a government will be unable to afford its interest payments; but considering the measures policy makers in the region are taking to curb deficits, reduced growth and tax revenues will lower this line in the sand. Should a country be forced to tap the European Financial Stability Facility or look for a unique assistance program akin to the one Greece worked out; the probability of a happy resolution to the region’s troubles will drop rapidly. And, though Europe is the thing to come to mind when financial instability is discussed; it is important not to write off the impact that China could have. Fitch warned this morning that the due to the booming economy’s rapid load growth and effort to repackage and sell its debt, the risk of a financial crisis has increased “considerably.” It isn’t difficult to imagine how investors would respond to an emergency in one of the best performing economies in the world.

As for tangible economic data on the day, the docket was populated with two indicators of note. Initial jobless claims through the week ending June 19th fell by 19,000 filings to 457,000 net. Though employment and consumer spending is the lynchpin to a meaningful recovery, this indicator does not hold enough influence to budge the barometer on growth forecasts. Alternatively, the durable goods orders reading for May is far more influential. Given the slump in housing, business activity and investment is one of the few pillars for positive growth remaining. That being said, the 1.1 percent contraction on the headline figure and even the 0.9 percent increase excluding transportation equipment will do little to fill a big shortfall in economic expansion. Tomorrow the final GDP reading will be released; but it holds little influence ahead of the G20.

Related: Discuss the US Dollar in the DailyFX Forum, Crowds Sell Yen and Buy US Dollar: Look for USDJPY Declines

Euro Contradicts Risk Trends and Ignores Financial Troubles for Second Consecutive Advance
Considering the selling pressure that has developed behind the euro over the past seven months as interest rate expectations, growth forecasts and even financial stability deteriorate; it is unusual that the shared currency should advance across the board when equities performed so poorly. This divergence can be traced to the source and intensity of the turn in risk appetite. Speculators were clearly in charge of market activity rather than being forced to respond to a overpowering catalyst, which leaves the fundamentally struggling currency left to lick its wounds. Nevertheless, conditions seemed to further decline in the background. Aside from a rise in financing costs, the news wires ran headlines that reported a nationwide strike across France in response to the effort to raise the retirement age and a measure of foreign direct investment by Europeans into other countries revealed a 24 percent drop through 2009. Perhaps offering a modest counterpart, the European Commission said in its quarterly assessment that the euro’s weakness could bolster exports 5 percent. The long-term effects are concerning though.

British Pound Unable to Overtake 1.50 against Dollar on Cautionary BoE Financial Report
The fundamental outlook for the British pound has improved by leaps and bounds over the past week thanks to the UK government’s remarkable budget proposals and the outlier vote at the Bank of England for a rate hike recorded in the minutes of the last policy meeting. However, the positive outlook was not going to go uncontested in conditions like those that the global markets are currently wading through. In its Financial Stability Report, the BoE said that the sovereign debt crisis in the EU posed a problem for domestic banks due to counterparty exposure and reduced access to credit. Translation: another shock could bring mainland Europe’s crisis to the United Kingdom’s doorstep.

Japanese Yen Enjoys Risk Aversion from a Funding Perspective, Deflation Eases
While the dollar would advance with Thursday’s risk aversion move, the yen certainly would. This highlights the difference between a currency that appreciates when sentiment is deteriorating due to its appeal as a safe haven and one that gains simply because carry exposure is being unwound. For a positive economic update, the deflation trend in national inflation was its weakest in 13 months in May at 0.9 percent.

New Zealand Dollar Can’t Catch a Break as Interest Rate Forecasts Hit a 9 Month Low
Everything seems to be developing in the New Zealand dollar’s favor. RBNZ Governor Bollard has sounded his hawkish call, medium-term inflation forecasts have picked up and the recently released 1Q GDP figures were robust enough to encourage a tightening policy. Nonetheless, the 12-month forecast for interest rates is at its lowest level in 9 months (133 bps). All ships sink in a low tide.

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Written by: John Kicklighter, Currency Strategist for DailyFX.com
E-mail: jkicklighter@dailyfx.com

DailyFX provides forex news on the economic reports and political events that influence the currency market.
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