US Dollar Outlook Unfazed by Worst Economic Contraction Since 1982
Written by David Rodriguez, Quantitative Analyst
Fundamental Outlook for US Dollar: Bearish- US Dollar finishes relatively unchanged despite massive S&P rally
- Federal Reserve running out of room to boost economy – what’s next?
- Markets react positively to dismal US GDP decline, but outlook remains dim
News of the worst US economic contraction in 26 years was not enough to keep the dollar at bay, as the US currency posted gains against the euro and other major counterparts to end the week’s trade. A fresh record-high in US unemployment insurance claims, continued all-time lows in interest rates, and an absolutely dismal capital expenditures report had similarly little effect on the dollar. One has to subsequently wonder whether otherwise significant economic data will have any real influence on the dollar through the foreseeable future. Friday’s highly-anticipated GDP report showed that the economy contracted at a much slower pace than feared, but a closer look at the details showed that future prospects remain dim. Perhaps the most troubling detail came from the typically resilient American consumer. Nominal consumer spending fell at a dramatic 8.9 percent annualized pace through the fourth quarter—the worst result in the survey’s 51-year history and an ominous sign of what to expect through 2009.
Fundamental outlook for the US economy remains poor, and such bearish sentiment would normally be enough to send the dollar significantly lower against major counterparts. Yet it is clear that markets are currently not “normal” by any stretch of the imagination, and fear-driven capital flows seemingly dominate exchange rate movements. We will subsequently watch for cues from highly risk-sensitive equity markets and US Treasuries; the dollar’s correlation between the Euro/US Dollar and US S&P 500 remains near its highest levels on record. That being said, the upcoming week of US economic event risk is relatively unlikely to provide a boost for downtrodden US stocks.
End-of-week US Non Farm Payrolls data is expected to show that the domestic labor market lost yet another 500,000+ jobs through the month of January—further reminder of the financial crisis’ effects on real economic growth. It will be important to watch earlier-week economic data to gauge overall expectations for the infamous NFP’s report, however, as key ADP Employment Change and ISM Services reports are typically leading indicators for the volatile jobs report. Suffice to say, it will take a noteworthy surprise in either ADP or ISM data to force a substantive shift in expectations. Otherwise, it may be important to watch for surprises in earlier Personal Income and Spending data. Short-term outlook for the US economy remains bleak, but whether or not the US dollar responds in kind is another matter entirely. – DR
Euro On The Edge Ahead Of Pivotal ECB Rate Decision
Written by John Kicklighter, Currency Strategist
Fundamental Outlook for Euro This Week: Bearish- Euro Zone inflation slumps to a near 10-year low 1.1 percent, clearing the way for further ECB rate cutsNext week, there are a top-tier economic indicators scheduled for release; but among them only the European Central Bank’s (ECB) rate decision has the potential to fundamentally redefine its currency’s trend. Looking back only six to eight months ago, FX traders were pushing the euro higher on the belief that the Euro Zone would be able to ride out the financial and economic contagion that was spreading beyond the US boarders. What’s more, there was the implicit belief that the region’s yields would remain a beacon for investors looking for safety of funds with the kind of returns that traders had become used to through 2007. How things have changed. Much of this optimism has been wrung out of the euro; however, the currency is still not on even ground with the US, UK and its other major counterparts. Interest rates offer the best method to either validate or dispel these lingering doubts.
- Fundamentals continue to break down for the euro, shaking the currencies subtle safe-haven appeal
- Forecasts steadily worsening for Europe as growth outlook dims, policy efforts come up short and government debt is cut
It is clear at this point that global interest rates are steadily heading towards a zero interest rate policy (with a number of notable economies already hitting this mark). This is an equalizing trend – one that has blatantly leveraged the demand for a safe haven and tipped the scales of risk / reward. And, in the panicked search for safety of funds, investors have targeted the depth and historical precedence that the US and Japanese markets; while European assets have been stung by being behind the global recession curve and through a lack of confidence in the young monetary union. However, the tables could turn. Should the European policy authority, ride out the rest of the economic slump (as a natural economic cycle it will eventually find a level of equilibrium) by holding their interest rates at a premium to global counterparts; forward-looking speculators will once again find the strength in the euro. In this capacity, Thursday’s rate decision could either signal the bank will maintain its pace of easing and possibly bring its primary cash rate near zero in a few months time; or officials can break stride by keeping policy unchanged and indicate their intentions to maintain the economy’s rate advantage. Why is there such heavy debate over their next rate decision; primarily due to ECB President Jean Claude Trichet’s comments at the last announcement (and later reiterations) that the next ‘important’ decision would be March’s. This has led many to speculate that the group will hold in February to wait for updated growth and inflation forecast figures in March. However, these comments may have been referring to the importance in economic data rather than the potential for policy actions. Regardless, the outcome of this meeting will be critical, especially with EURUSD and EURJPY (risk sensitive pairs) on the verge of major technical breakdowns.
At the same time, it is very unlikely that the euro will remain still while it awaits a resolution on interest rate speculation. Indeed, there is plenty of scheduled and unscheduled event risk outside the policy meeting that will help fundamental traders bide their time – and perhaps redefine their long-term fundamental forecasts. On the docket, traders will be watching retail sales numbers from both the Euro Zone and Germany, as well as factory activity figures. Outside of the neat world of foreseeable risk, market participants will also be on edge looking out for any additional sovereign debt downgrades among its members as well as announcements of expanded stimulus and bailout activity. - JK
Japanese Yen May Finally Break From Its Range As Risk Trends Swell
Written by John Kicklighter, Currency Strategist
Fundamental Outlook for Japanese Yen: Bullish
These unspecified and unscheduled will remain the greatest threat to sentiment (and thereby the yen); but we will also find milestones for benchmarking these intangible factors along the way. Over the coming week, a few trends will be particularly important for deriving direction from the yen crosses. The most readily accessible driver will be interest rates. Three major central banks are set to announce their rate decisions over the period and each has its own place in the bigger scheme for risk. The Reserve Bank of Australia (RBA) is one of the few remaining, high-yield currencies out there; but a steady diet of hearty cuts has quickly lowered this benchmark and drug down the overall expectations for returns when things do turn around down. Another 100 basis point rate cut will lower the return side of the market’s scales of risk/reward. The Bank of England’s (BoE) forecasted 50 basis point cut to merely brings another key policy authority within reach of zero; which means officials will have to search out alternative policy methods. Finally, the ECB marks the dark horse, as uncertainty over its pace is shares a large responsibility in keeping expectations for an eventual return to risk appetite alive.
In contrast to returns, earnings and growth updates will gauge the level of fear in the market. While massive amounts of funds are being pumped into financial institutions and government guarantees are being stamped on corporate debt, we have seen the global recession put severe strain on earnings on the other vital sectors of the world’s economies. As the damage is tallied, investors realize just how bad the outlook really is. As for growth, there are many indicators that will offer minor adjustments to such a prominent forecast; but it will be the US non-farm payrolls report that offers the accessibility and influence that event risk and long-term fundamental traders crave. Another contraction on par with previous readings will signal to all that there is little doubt that the first quarter of 2009 is going to be worst than the final quarter of 2008. - JK
- A pull back in volatility may be the eye of the storm for investor sentimentRisk sentiment dominated the markets last week; and it will no doubt do so again next week. This is a promising trend for Japanese yen traders who are looking for volatility – and nail-biting for those that await a lasting trend. Among the major economic drivers for next week, half are scheduled and the other half are potential. From the impromptu column, there is still considerable uncertainty held over the health of the world’s economic health and its financial markets. Policy officials have grown somewhat over-zealous in their attempts to force stability on the masses; and so far, they have failed to inspire confidence. Is this a sign that a certain dollar, euro or yen figure - one that investors are confident offers a full safety net on the global economy - has not been met? Realistically, there is no such number; and if there were, it would bankrupt the world governments. Fear has lasted because there is still significant exposure through leverage and credit; and investors (as well as consumers and businesses) will take any opportunity to unload that risk whenever they are given the chance. And, as interest rates tumble, government debt ratings come under pressure and global growth cools, the equilibrium between risk aversion and risk appetite will elude the market – putting a bottom to pessimism further out of reach.
- Japanese employment, consumer sending, factory activity pushing economy deeper into recession
- Global interest rates quickly approaching zero, suggesting the eventual rebound will be a slow build for FX
These unspecified and unscheduled will remain the greatest threat to sentiment (and thereby the yen); but we will also find milestones for benchmarking these intangible factors along the way. Over the coming week, a few trends will be particularly important for deriving direction from the yen crosses. The most readily accessible driver will be interest rates. Three major central banks are set to announce their rate decisions over the period and each has its own place in the bigger scheme for risk. The Reserve Bank of Australia (RBA) is one of the few remaining, high-yield currencies out there; but a steady diet of hearty cuts has quickly lowered this benchmark and drug down the overall expectations for returns when things do turn around down. Another 100 basis point rate cut will lower the return side of the market’s scales of risk/reward. The Bank of England’s (BoE) forecasted 50 basis point cut to merely brings another key policy authority within reach of zero; which means officials will have to search out alternative policy methods. Finally, the ECB marks the dark horse, as uncertainty over its pace is shares a large responsibility in keeping expectations for an eventual return to risk appetite alive.
In contrast to returns, earnings and growth updates will gauge the level of fear in the market. While massive amounts of funds are being pumped into financial institutions and government guarantees are being stamped on corporate debt, we have seen the global recession put severe strain on earnings on the other vital sectors of the world’s economies. As the damage is tallied, investors realize just how bad the outlook really is. As for growth, there are many indicators that will offer minor adjustments to such a prominent forecast; but it will be the US non-farm payrolls report that offers the accessibility and influence that event risk and long-term fundamental traders crave. Another contraction on par with previous readings will signal to all that there is little doubt that the first quarter of 2009 is going to be worst than the final quarter of 2008. - JK
British Pound Outlook Hinges on BOE Rate Decision, Policy Statement
Written by Terri Belkas, Currency Strategist
Fundamental Outlook for British Pound: Bearish
- GfK consumer confidence tumbled to a 6-month low, savings intentions plunged to record low
- British pound benefited from surprise rise in UK mortgage approvals, Barclays news
- BOE MPC Member Blanchflower issues dovish comments, says BOE should cut rates “further and quickly”
The British pound was the strongest of all the majors last week, as the currency trades in a highly speculative manner and attempts to recoup the massive losses accumulated between October 2008 and January 2009. However, with both Credit Suisse overnight index swaps and a Bloomberg News poll reflecting expectations that the Bank of England will cut rates by another 50 basis points at 7:00 ET on Thursday to a new record low of 1 percent, it’s worth wondering how far this British pound rally can extend.
There are few doubts that the BOE will at least consider slashing rates again since the UK remains in a deep recession and officials anticipate that things will only get worse. In fact, BOE Monetary Policy Committee Member David Blanchflower, who is easily the most outspoken and dovish member on the Committee, said on January 29 that the UK economy may face a recession worse than that of the one in the 1980’s and that the Bank Rate needs to be cut “further and quickly.” Furthermore, he said that the MPC has considered their options in the case that the Bank Rate is cut to zero, which was quite timely comment when you consider that Chancellor of the Exchequer Alistair Darling gave the BOE permission today to buy 50 billion pounds worth of bond and commercial paper in order to alleviate tight credit conditions. Overall, this leaves the odds in favor of year another rate cut by the BOE on February 5, but the reaction of the British pound may depend on what sort of bias is reflected in the Monetary Policy Committee’s subsequent statement. As we saw with the reaction of GBP/USD to the BOE’s last rate cut, rallies in the pair are possible if the MPC leaves no indications that they will cut rates further. On the other hand, suggestions that the markets are correct to price in additional reductions could send the British pound the way of the New Zealand dollar following the RBNZ’s rate decision on January 28: down. – TB
Source : Dailyfx.com
- GfK consumer confidence tumbled to a 6-month low, savings intentions plunged to record low
- British pound benefited from surprise rise in UK mortgage approvals, Barclays news
- BOE MPC Member Blanchflower issues dovish comments, says BOE should cut rates “further and quickly”
The British pound was the strongest of all the majors last week, as the currency trades in a highly speculative manner and attempts to recoup the massive losses accumulated between October 2008 and January 2009. However, with both Credit Suisse overnight index swaps and a Bloomberg News poll reflecting expectations that the Bank of England will cut rates by another 50 basis points at 7:00 ET on Thursday to a new record low of 1 percent, it’s worth wondering how far this British pound rally can extend.
There are few doubts that the BOE will at least consider slashing rates again since the UK remains in a deep recession and officials anticipate that things will only get worse. In fact, BOE Monetary Policy Committee Member David Blanchflower, who is easily the most outspoken and dovish member on the Committee, said on January 29 that the UK economy may face a recession worse than that of the one in the 1980’s and that the Bank Rate needs to be cut “further and quickly.” Furthermore, he said that the MPC has considered their options in the case that the Bank Rate is cut to zero, which was quite timely comment when you consider that Chancellor of the Exchequer Alistair Darling gave the BOE permission today to buy 50 billion pounds worth of bond and commercial paper in order to alleviate tight credit conditions. Overall, this leaves the odds in favor of year another rate cut by the BOE on February 5, but the reaction of the British pound may depend on what sort of bias is reflected in the Monetary Policy Committee’s subsequent statement. As we saw with the reaction of GBP/USD to the BOE’s last rate cut, rallies in the pair are possible if the MPC leaves no indications that they will cut rates further. On the other hand, suggestions that the markets are correct to price in additional reductions could send the British pound the way of the New Zealand dollar following the RBNZ’s rate decision on January 28: down. – TB
Source : Dailyfx.com
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