US Dollar Relinquishes its Tepid Gains as the Dow Rallies Through much of Thursday's Asian and European session, the dollar was working on a modest but steady advance against most of its major counterparts. However, seeing as how this appreciation wasn't supplied by any fundamental strength on the dollar's own account; a timely reversal in equities would yield the same for the world's most liquid but maligned currency. Investor optimism started to recover in the middle of the European session and the advance was amplified when the US market brought another round of earnings releases with it. While the third quarter earnings season doesn't carry the authority of characterizing the definitive turning point for the markets (the previous quarter bore that responsibility) nor are market participants as hungry for any and all positive signs; the accounting to this point has offered evidence that a steady recovery is in place. Among the more notable companies to have issued income, returns or profit better than the market expected were American Express, McDonalds and AT&T. And yet, despite the consistent rally for the session, the benchmark Dow Industrial Average has not cleared the range that has developed over the past week. This is the same predicament that the dollar is, just in reverse. Investor sentiment has not veered from its bullish path; but another period of exhaustion suggests the steady buildup in speculative interests is growing extended.
When will the dollar recover? There are two conditions under which the currency can leverage a reversal: through a plunge in risk appetite or by breaking its negative correlation to market optimism. Realistically, the former has a greater chance of inducing a rally from the greenback than the latter. However, betting against the steady, seven-month trend is risky. Most standard economic indicators and events won't be able to turn the demand for capital returns around - it will likely develop through the natural progression of skepticism over the pace of the global recovery, the realization that the markets have outrun realistic yields and the panic-inducing influence of profit taking. There are a few events that could help catalyze this change. The first reading of 3Q GDP from the UK due tomorrow could contribute. The United Kingdom is perhaps the weakest of the industrialized economies; and so its bearing on global activity is significant - though not as significant as the US growth numbers due next week. However, here, it is difficult to tell whether the release will impact the dollar directly or through its risk connections. In the meantime, today's fundamentals were relatively staid. From the docket, Initial Jobless Claims measured through last Saturday rose more than expected to a 531,000 pace and the FHFA housing price index fell for the first time in four months. It was a modest consolation that the Leading Indicators index rose to 1.0 percent and official set a sixth consecutive reading of expansion - the most prolific trend since 2004. Commentary from policy officials carried a little more weight. The Chicago Fed President Evans said he expected a weak recovery through 2010 and that a jobless rate above 10% was likely. However, it was Boston Fed President Rosengren's suggestion that the dollar's recent pace was "natural" that truly caught the attention of currency traders.
British Pound Prepared for first 3Q GDP Reading of the Industrialized World with Breakout Pressure Building If there were one economic indicator that held the title of top event risk this week, it would have to be the UK 3Q GPD report. This is not only the first report on the United Kingdom's health through the three-month period; but it is the first measure of the period for any country in the industrialized world. In this capacity, the indicator will act as a benchmark for speculation surrounding global growth (with a mind to the activity in the emerging markets set with the strong report from China earlier today). However, pound traders will be particularly interested in this economic release. Last week, the sterling initiated an impressive rally that was otherwise light on fundamental fuel. Comments from Paul Fisher, the BoE's executive director for markets, seemed to touch off a much needed sense of optimism surrounding the central bank's policy stance. By suggesting the MPC may pause its bond purchases, he padded hopes that the central bank was nearing the turning point in its oppressive, dovish policy regime. The minutes from the last meeting could have offered confirmation that such a move was planned; but the group instead deferred a decision until its November meeting. At this point, the pound has already experienced its sharpest rally in five months; and there is little keeping the currency elevated. In comes the advanced GDP reading. Should the economy in fact have expanded as the consensus suspects it has, then it would go a long way towards verifying speculation that the economy is recovering and policy is set to do the same.
Euro May Finally Supply its Own Volatility with a Deluge of High-Level Event Risk The euro has pushed through a light week of event risk and the result has been a unit that was at the mercy of price action emanating from whatever currency it was paired with. The highlights for fundamental euro traders today included a 1.3 billion euro current account deficit for the Euro Zone after having printed the first surplus in 17 month and moderating commentary from ECB member Weber. The central banker took the same tone that President Trichet has implemented in his efforts to deflate speculation of imminent rate hikes. He said that there was no need to rush the exit for stimulus and that there were no price risks on the horizon. Perhaps his most meaningful comments were for forecasts of a better 3Q GDP number and a "slight increase" in activity for the Euro Zone. Looking ahead to tomorrow, the docket promises far more volatility. Among the notable releases are the monthly PMI numbers and German IFO sentiment survey. The manufacturing and service sector gauges are good leading indicators for the much broader (and delayed) GDP readings. Expectations are for positive readings (above 50) across the board.
Canadian Dollar Balks at Retail Sales, Responds to Transparent BoC Policy Report Heading into Thursday's session, the focus was on the August retail sales report and the Bank of Canada's Monetary Policy Report was expected to repeat a lot of what was said in the statement following this week's rate decision. However, this confidence in importance was clearly misplaced. The August reading of retail sales doubled expectations, but the frequently volatile nature of this data series offered little encouragement to bulls. In contrast, the BoC offered unexpectedly strong opinions like raising the currency assumption from $0.87 to $0.96 and lowering its quarterly growth projections for 2010 and 2011. The most influential comment would comeUS Dollar Relinquishes its Tepid Gains as the Dow Rallies from Governor Carney's comments after the report in which he said, "intervention is always an option."
updated Oct 22, 2009
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