US Dollar Rallies on Dow Losses, but will Stocks Finally Rebound?
Written by David Rodriguez, Quantitative Analyst
The US Dollar finished the week broadly higher against major forex counterparts, as flare-ups in financial market tensions led to aggressive buying of the safe-haven US currency.Fundamental Outlook for US Dollar: Bearish
- US Dollar finishes week stronger, but bounce in DJIA cuts into USD and JPY gains
- Worst US Retail sales decline in history fails to push Dollar lower
- Speech by Fed Chairman Ben Bernanke signals hope in ongoing financial crisis
The US Dollar finished the week broadly higher against major forex counterparts, as flare-ups in financial market tensions led to aggressive buying of the safe-haven US currency. Investors sent the US Dow Jones Industrials Average briefly below the psychologically significant 8,000 mark for the first time since November, but a subsequent ease in market tensions allowed downtrodden US stocks to bounce back through end-of-week trade. The recovery was all the more impressive given the absolutely dismal string of economic developments through recent weeks. In fact, December’s Advance Retail Sales report showed the biggest single-month decline in the survey’s 20-year track record. There are few signs of hope in recent economic data, but some believe that economic stimulus plans and the US Treasury’s bailout funds will improve US fundamentals. All the same, bleak outlook for the US economy does little to boost forecasts for the dollar.
The week ahead will be relatively tame in terms of planned economic event risk, but recent experience has shown that the US Dollar may nonetheless remain volatile on shifts in financial sentiment. The sole noteworthy reports on the calendar will come on Wednesday and Thursday, with NAHB Housing Index, Housing Starts, and Building Permits reports to shed further light on the state of the domestic housing market. An outright crash in house prices was the “smoking gun” that began the ongoing global financial crisis, but some hope that a material improvement in real estate markets will boost prospects for major financial institutions that hold toxic mortgage debt. However unlikely that may seem given current economic outlook, it will be important to watch any and all housing data as it relates to markets for home mortgages.
Otherwise the US Dollar will continue to trade off of global financial risk sentiment, and a continuation of recent bearish trends would likely send the US Dollars to fresh highs against the Euro and other risk-sensitive currencies. Medium term trends clearly favor further US Dow Jones Industrials Average losses, but extremely trough-to-peak volatility makes holding short positions extremely difficult. That being said, our own research shows that 2009 Price to Earnings (P/E) ratios on the Dow’s 30 stocks are currently at their lowest levels since 1996—at which point the Dow went on to stage a massive recovery. Though we certainly will not call for a stock market bottom in the face of such sharp declines, the underlying fundamentals for stocks have arguably improved—at least as far as common valuations are concerned. Whether or not a stock market bottom translates into a US Dollar top is another matter entirely, but recent forex correlations suggest that equity market rebounds would lead to commensurate dollar weakness. – DR
Euro Shows Bullish Potential Despite ECB Rate Cut, Bleak Outlook
Written by Terri Belkas, Currency Strategist
The euro ended the week mixed across the majors, as the currency slipped against the US dollar, Japanese yen, and Swiss franc but rose versus the British pound and commodity dollars.Fundamental Outlook for Euro This Week: Bearish
- ECB cuts rates in line with expectations by 50bps to 2.00%
- ECB President Trichet suggests neutral stance in February, possible rate cut in March
- Euro-zone trade deficit widens as exports plunge by the most in 8 years
The euro ended the week mixed across the majors, as the currency slipped against the US dollar, Japanese yen, and Swiss franc but rose versus the British pound and commodity dollars. Since risk aversion was one of the more predominant drivers of price action from Monday through Thursday, the moves suggest that the euro ranks more neutral currency, but in the same class the traditional carry trades. Meanwhile, it is important to note that despite the European Central Bank’s rate cut on Thursday to 2.00 percent, ECB President Jean-Clause Trichet’s indications that the central bank would leave rates steady in February provides at least a short-term bullish bias for the pair, so long as risk appetite improves. Meanwhile, hourly charts of EUR/USD show that the pair has held below trendline resistance since falling from its December highs, but it will be very important to watch where price stands relative to the trendline at 1.3400, as a break higher would suggest additional gains are to come.
Looking ahead to the next week, event risk will be relatively low but there are still a handful of indicators worth watching. On January 20, the German ZEW survey of investor sentiment is forecasted to show a slight improvement in opinion on the economic outlook, but a continued deterioration in confidence in the current situation. This is similar to what we saw with the US Reuters/University of Michigan consumer confidence index, which reflected a rise in the economic outlook as the government is likely to come to agreement on a fiscal stimulus plan amounting to $825 billion within weeks. On January 22, the European Central Bank’s Monthly Report is likely to highlight the bleak outlook for the economy and expectations for a decline in inflation pressures in the near-term, all of which created bearish potential for the euro. Finally, on January 23, the Purchasing Managers’ Index (PMI) for the Euro-zone’s services and manufacturing sectors are forecasted to reflect a contraction in business activity for the eighth straight month in January, while the composite index is anticipated to the worst level since recordkeeping began in 2005, highlighting the extent of the recession plaguing the region.
Japanese Yen Traders Focus On Emerging Risks In Financial Markets
Written by John Kicklighter, Currency Strategist
There are two concerns for fundamental yen traders next week: risk trends and fundamentals. As the market’s preferred safe haven currency (retaining the title from dollar liquidity) though, sentiment and fear will no doubt hold the greatest level of influence the Japanese yen’s future.
Fundamental Outlook for Japanese Yen: Bullish
Most notably, there will be a high sensitivity to the health of global financial firms. While it may seem that the US government’s $20 billion investment and $118 billion guarantee in Bank of America marked the end of just another potential bankruptcy, it instead highlights that round after round of liquidity injections, massive guarantees on debt, direct government investments and other efforts made until this point have not restored lender and investment confidence. With Citi announcing a split after a massive quarterly loss of its own and Barclays expected to suffer from the UK’s proposed ‘Bad Bank’ scheme, there is ample reason to believe another massive failure may be coming. Rating agencies certainly think this is a high probability outcome. In fact, Moody’s has forecasted defaults on speculative grade debt to hit 15 percent in 2009 as economic conditions turn ‘perilous.’
Aside from doomsday prophesizing, the economic calendar may also prove it is taking a greater influence over the yen’s future. As global interest rates trend fall closer to zero, the carry trade implications of this pair are reduced to nil. This leverages the currency’s support from being a net saver economy with large reserves as the most important factor to its retaining the title of a safe haven. However, should its growth deteriorate and financial markets crumble, Japan could surely lose its appeal as a destination for holding capital imbued with sense of fear. Through these concerns, we will see indicators like consumer confidence, the trade balance and service sector activity and the all sector indicator tout a greater influence over fundamental trends. More significant though will be the economic forecasts from the Cabinet Office and Bank of Japan. Though the policy officials are speculating like any trader (though access to data and experience probably make these more accurate educated guesses on the whole), their outlooks will act as a benchmark for everyone else to formulate their projections around. The BoJ’s rate decision (this time set with a hard time) this Thursday will work in a similar capacity, but without room for much in the way of traditional monetary policy, the real potential here rests in any suggestions that the central bank is turning to unorthodox efforts to save their economy. JK
Fundamental Outlook for Japanese Yen: Bullish
- Carry interest hits a new six-year low growth and financial troubles balloonThere are two concerns for fundamental yen traders next week: risk trends and fundamentals. As the market’s preferred safe haven currency (retaining the title from dollar liquidity) though, sentiment and fear will no doubt hold the greatest level of influence the Japanese yen’s future. As usual, it is hard to forecast what events will arise, much less be particularly market moving. However, there are a few significant factors from this past week that will likely carry over to the near future.
- The safe have yen and dollar may be losing their correlation to other risk-sensitive assets
- Global policy makers struggling to pull their economies out of steep recessions
Most notably, there will be a high sensitivity to the health of global financial firms. While it may seem that the US government’s $20 billion investment and $118 billion guarantee in Bank of America marked the end of just another potential bankruptcy, it instead highlights that round after round of liquidity injections, massive guarantees on debt, direct government investments and other efforts made until this point have not restored lender and investment confidence. With Citi announcing a split after a massive quarterly loss of its own and Barclays expected to suffer from the UK’s proposed ‘Bad Bank’ scheme, there is ample reason to believe another massive failure may be coming. Rating agencies certainly think this is a high probability outcome. In fact, Moody’s has forecasted defaults on speculative grade debt to hit 15 percent in 2009 as economic conditions turn ‘perilous.’
Aside from doomsday prophesizing, the economic calendar may also prove it is taking a greater influence over the yen’s future. As global interest rates trend fall closer to zero, the carry trade implications of this pair are reduced to nil. This leverages the currency’s support from being a net saver economy with large reserves as the most important factor to its retaining the title of a safe haven. However, should its growth deteriorate and financial markets crumble, Japan could surely lose its appeal as a destination for holding capital imbued with sense of fear. Through these concerns, we will see indicators like consumer confidence, the trade balance and service sector activity and the all sector indicator tout a greater influence over fundamental trends. More significant though will be the economic forecasts from the Cabinet Office and Bank of Japan. Though the policy officials are speculating like any trader (though access to data and experience probably make these more accurate educated guesses on the whole), their outlooks will act as a benchmark for everyone else to formulate their projections around. The BoJ’s rate decision (this time set with a hard time) this Thursday will work in a similar capacity, but without room for much in the way of traditional monetary policy, the real potential here rests in any suggestions that the central bank is turning to unorthodox efforts to save their economy. JK
British Pound May Finally Find Direction Through GDP Numbers
A year ago, the most risk-sensitive currency was probably the high-yielding Australian or New Zealand dollar as yields were the primary source of speculation for traders. However, this dynamic has changed as global interest rates have trended towards zero while liquidity and fundamental stability have become a valuable commodity.
Fundamental Outlook for British Pound: Bearish
Looking out at the coming week, the UK docket promises to be the most active – thereby imparting the sterling with the greatest potential for fundamentally inspired price action. Among the many economic releases, the most market-moving is without question the advanced reading of fourth quarter GDP. Not only will this mark the severity of the United Kingdom’s burgeoning recession; but it will also stand as a benchmark for the global recession as the notable first G10, year-end growth number. Just this past week, central bankers from the world’s financial centers at the Bank of International Settlements (BIS) meeting agreed that the world economy was going to slow “significantly” in 2009. From this dour outlook, we will see a key currency market fundamental driver emerge. Which economy is experiencing the least severe contraction, looks to recover first and will have a natural rate advantage over their global counterparts are questions that will define major fundamental trends. The UK’s leading GDP number is expected to cross the wires with a 1.4 percent annualized slump – what would be the worst recession for the economy since 1991. At this rate, the pound looks to keep its title as the worst fundamental performer.
Event risk doesn’t rest with the growth figures alone. Though more mundane, many of the other economic indicators scheduled for release are top tier in their own right. Finding a common link in the data, it can all be linked back to consumers – the lynchpin of economic activity going forward. For the sector that started it all, the housing recession will take direction from the January Rightmove figures. Surprises will be limited here – whether it be a rebound or an extension in the otherwise well-established slump. Credit, employment and consumption trends are less certain. PM Brown and BoE Governor King have attempted to unfreeze credit, to no avail; which makes the public sector net borrowing figure an interesting reading. The December jobless claims change is expected to extend the worst labor trend since 1991 and retail sales are oddly enough expected to post only a modest monthly decline through the same period. For a broader reading, the December CPI numbers may lend credibility to the MPC’s concerns that deflation is a real threat for the economy; but its more immediate influence will be on the interest rate outlook. The BoE cut its benchmark another 50 basis points last earlier this month to 1.50 percent. If price pressures drop back to or below target, it will be one more obstacle removed to setting a zero interest rate policy. - JK
Source : Dailyfx.com
Fundamental Outlook for British Pound: Bearish
- Fundamentals collapse through a record trade deficit, a record low in home sales and 14 year low in December retail salesA year ago, the most risk-sensitive currency was probably the high-yielding Australian or New Zealand dollar as yields were the primary source of speculation for traders. However, this dynamic has changed as global interest rates have trended towards zero while liquidity and fundamental stability have become a valuable commodity. This has put the spotlight on the British pound which is backed by an economy that threatens to tumble into a deep recession and an interest rate that could very well be at zero within a few months time.
- UK officials expanding their efforts to thaw credit markets by guaranteeing 21 billion pounds of corporate loans
- Risk trends showing a greater sway over the fundamentally week British pound
Looking out at the coming week, the UK docket promises to be the most active – thereby imparting the sterling with the greatest potential for fundamentally inspired price action. Among the many economic releases, the most market-moving is without question the advanced reading of fourth quarter GDP. Not only will this mark the severity of the United Kingdom’s burgeoning recession; but it will also stand as a benchmark for the global recession as the notable first G10, year-end growth number. Just this past week, central bankers from the world’s financial centers at the Bank of International Settlements (BIS) meeting agreed that the world economy was going to slow “significantly” in 2009. From this dour outlook, we will see a key currency market fundamental driver emerge. Which economy is experiencing the least severe contraction, looks to recover first and will have a natural rate advantage over their global counterparts are questions that will define major fundamental trends. The UK’s leading GDP number is expected to cross the wires with a 1.4 percent annualized slump – what would be the worst recession for the economy since 1991. At this rate, the pound looks to keep its title as the worst fundamental performer.
Event risk doesn’t rest with the growth figures alone. Though more mundane, many of the other economic indicators scheduled for release are top tier in their own right. Finding a common link in the data, it can all be linked back to consumers – the lynchpin of economic activity going forward. For the sector that started it all, the housing recession will take direction from the January Rightmove figures. Surprises will be limited here – whether it be a rebound or an extension in the otherwise well-established slump. Credit, employment and consumption trends are less certain. PM Brown and BoE Governor King have attempted to unfreeze credit, to no avail; which makes the public sector net borrowing figure an interesting reading. The December jobless claims change is expected to extend the worst labor trend since 1991 and retail sales are oddly enough expected to post only a modest monthly decline through the same period. For a broader reading, the December CPI numbers may lend credibility to the MPC’s concerns that deflation is a real threat for the economy; but its more immediate influence will be on the interest rate outlook. The BoE cut its benchmark another 50 basis points last earlier this month to 1.50 percent. If price pressures drop back to or below target, it will be one more obstacle removed to setting a zero interest rate policy. - JK
Source : Dailyfx.com
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