- Dollar Steady Ahead of Rebound in Liquidity, NFP Countdown
- Euro Traders May Place Their Confidence in the ECB
- British Pound Traders Expect an Increase in Bond Purchases from BoE
- Australian Dollar’s Improved Rate Outlook May not be Enough
- Japanese Yen: Officials Brace for Risk Appetite Tremors
- Canadian Dollar Supported in Risk Vacuum by Energy Prices
- Gold Ready to Hear ‘Stimulus’ from the ECB
Dollar Steady Ahead of Rebound in Liquidity, NFP Countdown
The Dow Jones FXCM Dollar Index managed to carve out its biggest advance this past session since the massive rally back on June 21. We shouldn’t, however, take this as a leading read on a new trend ahead of heavy event risk into the end of the week. Given the level of importance attributed to the financial health of the Euro region and the pace of growth for the world’s largest economy, the forthcoming ECB rate decision and June NFPs can dramatically alter the direction and pace of the capital markets. Instead, the greenback’s advance this past 24 hours session can be attributed to the lack of liquidity due to the holiday trading period. Without US capital markets online, there was a significant break in continuity should the remaining speculative element try to build into any significant position â€" unlikely ah ead of meaningful event risk.
Now, we look ahead to a period that will certainly be active for headlines and has considerable potential to tap into underlying risk trends â€" and thereby shack the dollar to life. The European rate decision (which I cover in detail below) will act a critical qualifier for how the market will interpret the Euro-region’s financial prospects following the EU Summit last week. Skepticism followed almost immediately after the substantial programs early Friday morning last week. If the central bank doesn’t provide a better footing, hesitation could translate it outright selling of not only the euro but risk-related assets in general. Of course, with the NFPs behind the European even, we need a clear outcome to encourage a run. Furthermore, with the 2Q global GDP (with China) and 2Q US earnings session beginning the following week; the distraction to momentum ratio is high. Of course, if it all lines up to the general outlook for growth and yields (bearish ), it could feed an incredible trend.
Euro Traders May Place Their Confidence in the ECB
Expected volatility (often considered the best measure of ‘risk’ or ‘fear’) for the currency market stands not far from the four-year low the index plunged back in late April. Any contrarian trader would say that is an interesting position to be in considering the heavy event risk we are heading into through the remainder of this week. Both risk and euro traders are on high alert with the upcoming ECB rate decision on deck for 11:45 GMT. This particular meeting carries far more weight than any of the previous gatherings over the past few years because it may be treated as a necessary complement to last week’s EU Summit. While the policy agreements that were listed by the authorities after the first day of that meeting were substantial, a market that has grown cynical after too many botched rescue attempts over the past years honed in on the lack of detail for implementation. And, for good reason. Germany, Finland and the Netherlands have all alluded to opposition to the promised programs.
So, what is the market looking for in this ECB decision? There are two underlying considerations to the policy meeting: how it affects the yield potential of the Euro and whether it supports the Summit promises. The euro â€" like anything else â€" has an element of risk and reward to it. The ‘reward’ component is roughly set by its benchmark yield. Cutting the rate from its current 1.00 percent lowers that income potential. It could also contribute to stabilizing financial instability for the region, but there is likely very marginal return for speculative confidence at this level. The more critical aspect is whether the central bank announces additional stimulus efforts (reactive the SMP, a new LTRO or something else). That would fortify confidence not just for the euro region but broader financial markets. Tension is high and expectations are low.
British Pound Traders Expect an Increase in Bond Purchases from BoE
Though the Bank of England is scheduled to deliberate on monetary policy in the upcoming session as well â€" and will very likely increase its bond purchasing program â€" the market will give it only a fraction of the attention that will be paid to the ECB. For the sterling, a boost to the stimulus effort will act to devalue the currency and will do little to produce a firewall to the Euro-area’s building crisis. After the close 4-5 vote to keep bond purchases at 325 billion sterling last month, a boost this go around seems likely. That said, the BoE’s balance sheet is still far smaller than its major counterparts. As such, this program does little to curb global sentiment trends. Pound traders should watch the MPC newswires closely, but expect more from the ECB spillover than direct efforts of the Bank of England.
Australian Dollar’s Improved Rate Outlook May not be Enough
The Aussie dollar slipped modestly against the safe haven dollar Wednesday, but there was little pace on the move. Retail sales data for May offered a positive bearing with a fifth monthly advance, but that was offset by a 10-month low in Chinese service sector activity. Rate expectations have kept the Aussie dollar buoyant (not 76bps of cuts in 12 months), but active risk trends or risk aversion are critical here.
Japanese Yen: Officials Brace for Risk Appetite Tremors
Bank of Japan Governor Shirakawa was on the wires early Thursday morning reflecting on the uncertainties in the global market and vowing to do everything needed to ensure financial stability for the country. This is a timely warning as we head into a period that carries a high threat of volatility thanks to the ECB rate decision and NFPs on Friday. Japanese officials are bracing for impact, but will not likely act even under duress.
Canadian Dollar Supported in Risk Vacuum by Energy Prices
I usually talk down the USDCAD correlation to energy prices because they often follow the same underlying fundamental drive (rather than one influencing the other). However, with risk appetite trends sidelined and most of the other major themes on hold Wednesday, the big move from US crude this past week moves to the forefront of active drivers for this particular exchange rate. That said, risk will likely take over again.
Gold Ready to Hear ‘Stimulus’ from the ECB
Over the past week, gold has moved back towards the top of a multi-month wedge pattern (often considered the harbinger of an impending breakout) while ETF holdings of the precious metal hit a new record high of more than 77.5 million ounces. As a safe haven, the metal could react to a disappointment from the ECB that undermines market-wide sentiment. However, the dollar would more likely win out and drive gold lower. What gold traders want is a move that boosts European stimulus, to further leverage the commodity’s anti-fiat appeal.
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--- Written by: John Kicklighter, Senior Currency Strategist for DailyFX.com
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