US Dollar Losing its Opportunity to Produce a Meaningful Breakout before Liquidity Drains

US Dollar Losing its Opportunity to Produce a Meaningful Breakout before Liquidity Drains


We can see the level of influence that underlying currents in risk appetite can have on the US dollar on a day like today. Tuesday’s economic docket was packed with economic events and indicators; and yet the currency would end the day well within its predefined range and ultimately little changed through the close. However, where direction is absent there is still an abundance of volatility. This is a manifestation of the slow contraction in liquidity that will eventually drop off on the close of the Wednesday’s US session, when the United State’s extended Thanksgiving Holiday officially starts.



• Euro Finds Little Encouragement from German Growth Readings, ECB Stimulus Steps
• Pound Slips after BoE Governor King Offers up a Dismal Time Frame for Withdrawal
• Japanese Yen’s Funding Currency Status Finding Pressure from Finance Minister Fujii

US Dollar Losing its Opportunity to Produce a Meaningful Breakout before Liquidity Drains
We can see the level of influence that underlying currents in risk appetite can have on the US dollar on a day like today. Tuesday’s economic docket was packed with economic events and indicators; and yet the currency would end the day well within its predefined range and ultimately little changed through the close. However, where direction is absent there is still an abundance of volatility. This is a manifestation of the slow contraction in liquidity that will eventually drop off on the close of the Wednesday’s US session, when the United State’s extended Thanksgiving Holiday officially starts. Conditions during these periods can be extremely erratic; and history has armed us with a number of examples of meaningful breaks during these shallow periods. Yet, the true test of conviction in this period of tenuous equilibrium is the establishment of a trend with meaningful follow through – a tall order when such a big segment of the market is absent.

When adjusting for the influence of risk appetite, today’s US-based fundamentals would offer a distinct sense of concern veiled by a façade of better-than-expected headline readings. The top data for the day was the second (or preliminary) reading of third quarter GDP. The advanced reading reported last month offered traders with foresight beyond immediate volatility a reason to be bullish with a 3.5 percent annualized pace of expansion that brought an end to the worst recession since the Great Depression. From the revision, we would better see the argument for restraint in projecting a robust recovery. As expected, the headline pace was revised down to a 2.8 percent pace of expansion; but more contentious and valuable was the breakdown. Personal consumption and gross private investment saw negative revisions offset by exports and government consumption. A sustainable rally cannot be sustained on stimulus and government spending but rather consumer demand and business investment. The same general sentiments were elicited from the Conference Board’s confidence survey for November. Though the improvement was unexpected, the indicator would still report a sense of net pessimism. The breakdown was even further discouraging with a current conditions component that hit a 26-year low (expectations are arguably easier to manipulate); while the six-month outlook for business, employment, income and plans to make major purchases all declined.

All told, the tempered pace of growth and ‘realistic’ look at growth isn’t surprising. While the United States and global economies have been pegged for a recovery; policy officials have been careful and consistent in their calls for a restrained return to growth. However, gauging the pace of the economy’s recovery against that of its peers is the source of one of the biggest fundamental drivers for the currency market. And, therein lies the importance of today’s FOMC minutes. Overlooking the hold on the benchmark lending rate and stimulus policies, the central bank released its growth forecasts for the next three year. The group raised its growth forecasts to 2.5 to 3.5 percent and lowered its projections for unemployment to 9.3 to 9.7 percent through the fourth quarter of 2010. This is a tangible benchmark to work with that takes into account the most timely data and is therefore far more useful than the lagging indicators that have come across the wires recently. As for the dollar, it would seem their suggestions that low rates could be encouraging risk taking may be a subtle hawkish warning; but the remark that the currency’s decline to this point has been “orderly” is far more direct for currency traders.

Euro Finds Little Encouragement from German Growth Readings, ECB Stimulus Steps
The euro was loaded with a dense economic calendar and central bank activity of its own Tuesday; and just like the dollar, it would ultimately endure the fundamental wave while taking its cues from risk-based trends. For scheduled event risk, the final reading on 3Q German GDP was the top-billed report. The headline figures would fall in line with expectations with 0.7 percent expansion through the three-month period while the adjusted annual measure would contract 4.8 percent. The breakdown would hold some surprises. Efforts to rebuild inventories and government stimulus would lead the recovery while vital consumer spending and trade would anchor projections for a true recovery. Private consumption contracted 0.9 percent through the quarter while a bigger increase in imports than exports would subtract half a percentage point from overall GDP. What’s more, considering Germany is expected to lead the broader Euro Zone in its recovery, this kind of data sets a dour precedence.

The other notable, scheduled release for the day was the German IFO business confidence survey details for November. The headline sentiment reading hits a 15-month high with a strong contribution from the expectations component that would help fill in for the rather reserved reading of current conditions. Also, off the docket, news that the ECB was debating whether or not to change its 12-month loans to an adjustable rate rather than the fixed 1 percent standard presented another clear (if not measured) step towards removing stimulus.

Pound Slips after BoE Governor King Offers up a Dismal Time Frame for Withdrawal
Though anchored by the market’s overwhelming sense of stability, the British pound would end Tuesday lower following discouraging remarks from Bank of England Governor Mervyn King. Seeming to grow more comfortable with his recently donned realist and pessimist traits, the policy maker said that the United Kingdom faces “profound challenges.” He went on to say that one of the most important questions for the central bank going forward was trying to gauge when the appropriate time was to withdrawal stimulus; but warning that further increases to quantitative easing and his loose time frame for tightening policy over the next two to three years was hardly encouraging. As for the docket, the increase in the BBA home loans through October to a 42,238 pace marked the seventh increase and the highest level for lending since January of 2008. However, for market-moving impact, tomorrow’s GDP revisions will likely hold more sway over the fundamental crowd.

Japanese Yen’s Funding Currency Status Finding Pressure from Finance Minister Fujii
It is interesting that despite the fact that actual volatility on one-week USDJPY options is at its lowest levels since December of 2007, speculative interest on the pair has been pushed to a bullish extreme. The US dollar is still taking a lot of the heat off its Japanese counterpart by standing in as a more affordable source of funding for the increasingly popular carry trade. However, Finance Minister Fujii may be inadvertently but actively trying to revive his currency’s natural bearish weight with repeated suggestions that a long-term recovery cannot establish itself under the burden of deflation. So while the BoJ has taking a cautious but positive outlook on growth, the government still trying to encourage policy easing.