- Dollar Slips after Fed Forecasts Turn Slightly More Hawkish?
- British Pound Resilient Despite Double Dip Recession
- New Zealand Dollar Advances after RBNZ’s Slightly More Dovish Tack
- Japanese Yen Gains Despite Positive Risk Sentiment
- Euro: ECB President Draghi Eases His Inflation Tone
- Canadian Dollar Looking to Capitalize on Break to 7-Month High
- Gold Recovers from Yet Another Early Fall Thanks to the Dollar
Dollar Slips after Fed Forecasts Turn Slightly More Hawkish?
When an asset or a market doesn’t falter on bearish news, it is often a sign of an overall bull market. But, what does it mean when the capital markets and dollar neither rise on bullish developments nor fall on the bearish? Heading into the top event risk of the past trading session – indisputably the Federal Open Market Committee (FOMC) rate decision – the dollar had working its way into a terminal congestion pattern. For the non-technical traders, that is a situation in which the market essentially have to pick a direction; and the inclusion of a major fundamental catalyst in the equation to instigate the move further leverages the expected fallout. And yet, the Dow Jones FXCM Dollar merely trickled outside of its tight range well after the data hit the wires. Even more remarkable against the outcome of the day’s fundamentals, it was a bearish move.
To appreciate why the S&P 500’s (my favored risk barometer) trek back up to the top of its 1395-1360 range as well as the US Dollar index’s stumble below 9900 was so unusual, we need to refer to the event risk over the past session. The Fed festivities came in three waves. First up, we had the rate decision and minutes. Holding the benchmark at the range up to 0.25 percent should surprise no one. However, for a market that has become quite adept at extracting the meaning behind every one of central bank’s punctuation marks, the slightly hawkish shift from the group statement didn’t require special interpretation. In addition to the ‘moderate’ growth outlook, the group dropped the phrase from its previous statement that inflation was “subdued in recent months”, instead saying it picked up somewhat.
Far more objective for the distant rate forecasters, the forecasts were supporting the hawks across the board. The 2012 GDP forecast was upgraded to a range of 2.4-2.9 percent versus the previous 2.2-2.7 percent projection alongside an improved 7.8-8.0 percent jobless rate outlook from 8.2-8.5 percent scope laid out in January. Those took the pressure off more stimulus, but what tips the scales to a slightly more hawkish stance was the upgraded inflation outlook (now 1.9-2.0 percent for the year versus 1.4-1.8 percent previously). Those market participants that simply will not give up their hope for stimulus could seek support in the third round of the Fed event: Chairman Bernanke’s press conference. He said the group remains “prepared to do more”, but it would be quite the stretch to see that as an active dovish position. From the market, the 12-month rate forecast jumped back up to its 9-month high, but neither the dollar nor Treasury yields would follow suit.
British Pound Resilient Despite Double Dip Recession
The British economy is officially in a ‘double dip’ recession. What does that mean? Just like it sounds, the UK has reentered a technical recession (back-to-back quarterly contractions) within a normal economic cycle. We haven’t seen this occur since back in the 1970’s. Taking an objective look at the data, the slump is far more restrained than the 2008 post-crisis recession; but it is still a serious problem for the economy especially against the backdrop of a contentious austerity push. Furthermore, the weak growth reading should undermine the recent hawkish tone of the BoE (as well as the market’s expectations for the group). The notable pull back in 12-month rate expectations supports that notion. Yet, the sterling rose against the dollar and euro. This is a fundamental gap, likely helped by stubborn risk trends, that should cause worry.
New Zealand Dollar Advances after RBNZ’s Slightly More Dovish Tack
Compared to the Fed’s meetings, the Reserve Bank of New Zealand’s rate decisions aren’t given nearly as much attention and analysis. Yet, when we look at the statement that followed the hold on the benchmark at 2.50 percent; there was a notable dovish shift. Against the suggestion that the economy was showing ‘signs of recovery’ the policy authority also commented that inflation would be near the middle of the defined target – appropriate after last week’s CPI reading. More straightforward for the FX world, the statement said the elevated currency could prompt a reassessment of policy. This could refer to a rate cut or intervention. Regardless of which option though, the kiwi advanced after the news.
Japanese Yen Gains Despite Positive Risk Sentiment
Yet another anomaly on an anomalous day was the Japanese yen’s late-session strength. As equities and other risk-sensitive assets climbed after the disappointing data of the past session, the safe haven / funding currency would still advance. That will no doubt be a serious concern for the Bank of Japan who are actively trying to devalue their currency. It is already hard enough to push the yen down when risk aversion sweeps over the market, but to see it rise when sentiment trends fall suggests an overall losing battle. That reality may further encourage the central bank to move on a boost to stimulus at Friday’s meeting. Economists see a 5-10 trillion yen increase as highly likely.
Euro: ECB President Draghi Eases His Inflation Tone
The focus of the past session was certainly on the UK economy and US monetary policy regime, but the Euro had its own interesting developments. Where three weeks ago, ECB President Draghi was voicing a more hawkish take on the future; we saw the central bank leader curb his inflation worries and call for a ‘growth compact’ yesterday. There goes any competitive rate hopes. Further complication would come via the Greek central bank governor’s suggestion that an exit from the Euro is a distinct possibility if austerity was abandoned after the election.
Canadian Dollar Looking to Capitalize on Break to 7-Month High
There are a lot of fundamentally confused drives amongst the majors and various capital markets this past trading session, but the Canadian dollar’s strength doesn’t stray too far into the unusual. An upgraded growth forecast for the US (its largest trade partner) is a boon. The US may be backing off its funding support, but that doesn’t hurt Canadian investment appeal. Further, Aussie and Kiwi rates are looking lower.
Gold Recovers from Yet Another Early Fall Thanks to the Dollar
With the greenback sliding, gold is given a distinct advantage. The metal needs that booster. Otherwise, we would have to look at the lower probabilities of further stimulus from the Fed and the expensive, alternative-store of wealth in the dollar would look less and less attractive. Short-term risk trends could very well settle out and expose underlying shifts. If that is the case, gold is in trouble.
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— Written by: John Kicklighter, Senior Currency Strategist for DailyFX.com
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