Friday, January 21, 2011

US Dollar: Will 4Q GDP and a FOMC Rate Decision Offset the Euro?

US Dollar: Will 4Q GDP and a FOMC Rate Decision Offset the Euro?
Fundamental Forecast for the US Dollar: Bullish
  • Fitch warns that the US is the worst performing AAA-rated sovereign
  • Existing home sales see their biggest surge on record – though the sector is still struggling
  • The dollar and other markets are primed for big moves
We can’t often say that a currency or market is looking at a potentially, trend-defining period ahead; but that dollar is certainly looking at just that over the coming week. From a very simplistic technical view; it could be said that the greenback has put itself on a pace for a meaningful bearish trend through the foreseeable future thanks to EURUSD’s rally above 1.35 this past Friday. However, the experienced trader would recognize that this move wasn’t replicated by other dollar-based majors. In fact, most of these pairs would see the single currency holding well off its recent highs. So, while this standout, anti-dollar move may find some level of follow through; it most certainly is not a guaranteed trend for the greenback. But, the potential for a true trend is high with many potential catalysts along the way.
As always, we should consider risk appetite levels as the top fundamental threat. It may not be the most pressing concern at the moment; but when investor sentiment does shift, it will move the entire market and likely generate the kinds of trends that most traders pine for. And, while there are plenty of indicators to point to as tangible drivers; the most influential catalyst is risk appetite itself. It has not proven an easy task to shift sentiment in one direction or the other; so its development will require a substantial marker. Though it may not seem so now, Europe’s financial difficulties can still move the entire market. In the past weeks, we have seen some level of relief through the belief that the EU is working together to stabilize the region’s financial troubles. However, they have struggled in the past to come to key agreements; so why would it be any easier now? Other issues to contemplate: the possibility that China will hike rates; that Japan will see a debt crisis; that 4Q earnings will break the steady bearing of confidence or the US housing sector will fall to another crisis.
Yet, if we want to talk about known and scheduled threats; there are two key events to keep track of. The first chronologically also carries the least potential for a major drive for the currency. The FOMC rate decision is not likely to result in any change in the stimulus program or benchmark rate; but hawks and doves work on more subtle shades of grey. The accompanying statement’s tone can prove critical to defining the time frame for an eventual return to hikes (within 2011 or after the turn over the year); and more importantly, if there is to be a change in the stimulus program. The Fed seems intent on follow through with the $600 billion program and its originally planned maturity date; but there have been proponents on both sides that have suggested there are contingencies for changing this timing.
The most influential release for the week will be the first reading of the fourth quarter GDP numbers. The US seems on a steady path towards recovery; and investors, policy makers and consumers will look to ensure this is the case. That said, this is not as easy an indicator to interpret as it may at first seem. A positive showing may have the side effect of encouraging a quicker removal of stimulus (something that has proven to be the foundation for the recent capital market run up). Next, we need to establish whether a positive or negative reading carries more weight as a gauge for comparative growth or risk appetite. Feeding already saturated optimism will not carry as much weight as a much-needed breakdown in confidence. Another thing to consider: this is a Friday release. There will not be much time to respond to the report with full liquidity. – JK
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