U.S. Economic Data Weighs on Greenback

The Big Dollar is trading at a three-month low on a trade-weighted basis this morning. This is sullied further by yesterday’s disappointing U.S. durable goods figures and a rather downbeat assessment of the overall economy by way of the Fed’s Beige Book, which is a summary of national economic conditions. In addition, California’s declaration of a state of emergency over its budgetary divide, while making the challenges in Western Europe look rather minor at times, has also taken the wind out of the sales of the Greenback as traders ponder the notion of other states falling into a similar, albeit much less dire debt spiral.

While the euro has performed well against the dollar, it has suffered on most of the crosses as investors around the world remain cautious about whether or not the political will to move forward with the much needed fiscal austerity measures really exists in Europe to the degree that will be required. Nonetheless, the common currency is poised to take a run at the 1.31 handle this morning on a slew of positive European corporate earnings releases that have also buoyed equity exchanges on the continent. German unemployment figures were also released, largely in line with expectations and though they didn’t necessarily provide a boost to the common currency, you could almost hear the collective sigh of relief from trading desks in Frankfurt all the way across the Atlantic.

The pound sterling has also been slowly grinding higher this morning despite the release of some less than supportive economic figures. While mortgage approvals printed a figure in line with the market’s consensus view, the nationwide housing survey and net bank lending to individuals both came in well below expectations. Corporate earnings releases in the UK, a robust equity market and by extension, an appetite for risk, are nonetheless providing some support for the seemingly elastic pound which has now bounced nearly 12 pence in the last two-and-a-half months.

Secondary Currencies Continue to Shine

The other trend story in currency markets however continues to be the outperformance of the high beta or secondary currencies. The dollar bloc commodity cousins of Australia, New Zealand and Canada continue to impress overall despite temporary lulls in support while the market’s appetite for other commodity currencies and emerging markets most leveraged for growth continues to advance. All this positivity centering upon the high beta currencies, those typically most susceptible to higher volatility especially as it relates to global risk appetite, has been one of the overriding themes in FX markets through the first half of 2010. Generally supported by positive and growing interest rate differentials, the world’s secondary currencies are advancing at the expense of the traditional economic powers in the U.S., UK, Europe and Japan.

Part of the explanation for this marketplace lies in a changing attitude or market response to overall risk sentiment. While we have by and large been trading in an environment where the USD has been inversely correlated to overall risk appetite (an increase in optimism has led to a decrease in the dollar and vice versa), the dollar now seems to still be selling off when risk is in vogue but simply selling off less when risk is taken back off the table. In short, the dollar has been under pressure in both market environments as of late, just more so when stocks and commodities are advancing than when they are retreating. This is definitely a phenomenon we are going to want to keep an eye on in the period ahead.

North America Economic Data and USDCAD

Thursday is a relatively light data day in terms of North American economic releases though the earnings season is now in full swing. Both of Canada’s Raw Materials Price Index and Industrial Products Price Index came in well below expectations while US initial jobless claims managed to print precisely the expected figure at 457K which is over the magic 400K mark that is generally considered to be the figure that is required to see positive jobs growth south of the border. The big data release that everyone seems to be waiting for is tomorrow Q2 US GDP figure that will provide markets with a much needed overall economic report card on the US recovery.

As for USDCAD, more than a few traders seem to be captured in what can best be described as Bill Murray’s shoes in the movie “Groundhog Day.” We’re back in the low 1.03s after testing and failing to break higher in late trading yesterday, further exercising the range that has fully encapsulated the market outside of Tuesday’s brief plunge in the early morning hours to the mid-1.02s. With very little in the way of data to provide fresh incentives ahead of tomorrow’s GDP release, I think we can by and large expect more of the same in terms of price action.

By Mark Frey, Regional Director for Corporate Canada
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