Posted by Mulder Venture at 2:51 pm
• US Dollar Stumbles as Risk Appetite Perks up, 2010 Budget Deficit Balloons
• Australian Dollar Establishes a High Level of Volatility before the RBA’s Rate Decision
• British Pound Recovers Lost Ground with Manufacturing and Lending Data
US Dollar Stumbles as Risk Appetite Perks up, 2010 Budget Deficit Balloons
The Dow Jones Industrial Average and gold were putting in for hearty advances Monday; so naturally the US dollar would end the session in the red. Risk appetite improved progressively as the day wore on, aided by a round of impressive economic data and a sense of market stability that stood in contrast to the past two weeks. Stability in price action and underlying sentiment cannot be overlooked. Just like the buildup of high-yield positions through 2009 necessitated a natural correction this year; the consistent plunge in risk appetite through the second half of January would encourage a correction to put the market back on a fundamental equilibrium. However, until the case for a meaningful change in underlying sentiment can be made, the changing winds can be chalked up to a correction in a larger trend.
Looking for specific drivers for price action today, there was a round of economic data and a few unscheduled events that would work it just right so that risk appetite would be reinforced while the dollar’s appeal would be further diminished from a global perspective. From the docket, this morning’s top release was the January ISM manufacturing activity report. In the past, this indicator was the second most market-moving indicator (behind NFPs); but with the focus shifting to much larger themes, its volatility potential has certainly ebbed. However, with the US struggling to establish its recovery, the indicator’s fundamental influence has actually increased. Much like the Chinese, Australian, Euro Zone and UK factory activity indicators released earlier in the day, the US reading pointed to recovery. The 58.4 headline figure was the highest level for the series since August of 2004. Perhaps more impressive was the component data. Production rose to its highest level since April of 2004 and new orders climbed to levels not seen since August of 2004. A note of caution should be taken when interpreting what this data means for the broader economy recovery though. Many economists are concerned that the clear strength in this specific sector is founded on rebuilding depleted inventories. If that is the case, the current run is ultimately limited. The other round of top flight event risk was the personal income and spending figures for December. Income rose for a sixth consecutive month while spending grew for a third. Considering consumer spending accounts for approximately three quarters of the economy, these are encouraging numbers. Yet, without a clear recovery in nationwide employment, the pickup in wages and consumption will amount to relatively little for the broader economy.
In contrast to the economic indicators of the past 24 hours, there were a couple events falling outside the regular data feed that would exact a far greater influence on a market that is more concerned with economic and financial health between economies. US President Obama released a $3.8 trillion fiscal 2011 budget that would push the current year’s deficit to a record $1.6 trillion. While rating agencies have repeatedly assured that the world’s largest economy would not see a credit downgrade; the market is nonetheless discouraged from the deep hole that the nation is digging itself into. As for the aim of this increase in spending, the president’s primary concern is job creation. To offset some of the outlay, the proposal calls for a freeze on some domestic programs, a fee on banks that benefited from the TARP program, and letting tax breaks for the oil industry and households with over $250,000 expire. As for the 2010 forecasts: inflation is expected to average 1.9 percent; the jobless rate was bumped up to 10 percent; and the GDP outlook was raised to 2.7 percent. Another report that came with a wide-angled lens was the Fed’s Senior Loan Officer Opinion Survey for the fourth quarter. According to statistics, loan demand from businesses and households weakened; while lenders have yet to begin repeal their tightening efforts of the past two years.
Australian Dollar Establishes a High Level of Volatility before the RBA’s Rate Decision
Over the past 24 hours, the Australian dollar was responding to the most active economic docket among the majors. And, though there are far fewer releases on board over the next 24; the fundamental influence will likely be even greater. Through Monday morning, event-risk traders were offered fourth quarter readings on housing prices and wage agreements, manufacturing activity and consumer-level inflation. The factory activity report notched higher; but it was the cumulative reading on price pressures that held the greatest influence over the currency. The Reserve Bank of Australia (RBA) is scheduled to announce its decision on interest rates today. All 20 economists polled by Bloomberg have forecasted a 0.25 basis point rate hike to 4.00 percent; but overnight index swaps reveal the market is pricing in some doubt at a 78 percent probability. For background, the central bank’s decision to hike the benchmark for a third consecutive time back on December 2nd was unprecedented. Not only would a fourth increase be unheard of; but it would come during a period when the global economy is struggling to establish stability in economic activity and financial markets. Furthermore, Governor Glenn Stevens suggested in commentary that followed the actual decision that further policy adjustments would likely come at a slower clip so that the economy could adjust to previous hikes. Therefore, if the central bank does hike today; the language that follows will likely further dampen expectations of a steady clip of policy tightening.
British Pound Recovers Lost Ground with Manufacturing Data
The British pound was perhaps the biggest move on the day; but the currency’s activity wouldn’t take a straight path. The single currency’s recent alignment to risk aversion flows (though the sterling is not a likely candidate for safe harbor nor was it used to extensively to fund carry positions) proved a fundamental weight as the sentiment improved market-wide. However, risk appetite wouldn’t be the only facet to today’s price action. Well-placed economic indicators proved fruitful enough that they helped offset the correction in risk appetite. Among a slew of manufacturing figures released Monday, the United Kingdom’s January reading would stand out with a 15-year high that points to a much-needed economic boost from a significant element of growth. Moving forward, the focus on Thursday’s BoE rate decision will intensify. There is speculation that the policy body will finally bring the bond purchasing program to a close. This would be a first step towards an eventual hike.
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