Dollar Recovers its Composure as the ECB, BoE Hold Balances Fed Outlook, Now on to NFPs

Dollar Recovers its Composure as the ECB, BoE Hold Balances Fed Outlook, Now on to NFPs

If we were looking at just the economic docket for fundamental catalysts for the US dollar, the currency’s essentially unchanged close to close performance would seem reasonable. However, as we well know at this point, the greenback’s temperament is far more complex than a simple academic assessment of economic activity. The ‘sleeper’ element of price action over the past weeks - risk appetite trends - would contribute little to direction Thursday. The benchmark S&P 500 index showed a modest increase in volatility through the day; but the session’s performance was ultimately unchanged just like the previous day’s. And, considering the benchmark currency and investor optimism have been fully vested in the influence and omnipotence of stimulus; there was considerable interest in how the day’s monetary policy meetings and commentary (from both within and outside the US boarders) would influence the ailing greenback. Despite an opposing current of policy chatter from Fed officials and a decidedly more neutral/hawkish lean from US counterparts, the dollar would maintain stability. Is this a sign that the dollar is searching for a bottom in its aggressive selloff or perhaps a pace shift in reverence to tomorrow’s NFPs? Time and fundamentals will decide.


As for today’s fundamental cross winds, the most remarkable development was in the global stimulus debate. While the focus has been on the US dollar, because it has suffered for the Fed’s superfluous policy stance; an accommodative monetary and fiscal approach is really a global approach. Point in case, is the Bank of Japan’s decision to open the floodgates earlier this week, the Bank of England’s 200 billion sterling bond purchasing program and the ECB’s three-month unlimited lending facility as well as its sovereign debt purchase program. However, the concern is expansion. Both the ECB and BoE had the chance to ‘go with the flow’ and increase their support of the stressed recovery. Instead, both groups would vote to maintain their current programs and wait for further developments. This could have worked against the greenback as it would highlight the Fed as one of the few authorities that are still loosening the reins. That being said, the Federal Reserve hasn’t actually taken a step towards expanding its program. To this point, the group has put a floor under its existing $2 trillion in support and a few members have argued the legitimacy of additional stimulus. The real momentum in this debate is speculation. Eventually, speculation will require action to legitimize the significant shift in value.


This debate over the future of stimulus will maintain its influence going forward; and it may very well leverage Friday’s top-tier event risk. The US labor statistics for September have significant influence over expectations for the pace of economic output going forward. On the one hand, this data can boost or undermine risk appetite and cater to the greenback’s safe haven status. But more likely, the employment figures will reinforce or negate the need for additional Fed stimulus. For the near-sighted speculators, the change in payrolls (NFPs) is the primary concern. A 5,000 net contraction would offer modest support for expansion. A real sense of employment health though resides with the jobless rate and average earnings as a gauge for wealth and spending – and this data is already following a bearish bias.


Related: Discuss the Dollar in the DailyFX Forum, John’s Analyst Picks: ECB Rate Decision Setups up EURJPY, BoE Includes EURGBP


Euro Steady after ECB President Trichet Keeps Policy Out of the Stimulus Current

On a relative basis, the euro received a significant fundamental boost Thursday after the European Central Bank maintained its neutral policy stance. When we look at the Bank of Japan which lowered rates and created a new stimulus program while the Fed is heavily expected to step up its support, the ECB’s decision to maintain its bearing is remarkable. In fact, the group could actually be considered to have taken a modestly hawkish shift in its approach. After maintaining rates, central bank President Jean-Claude Trichet confirmed the need for a gradual exit from its unorthodox policy efforts and a return to a competitive bid. This is juxtaposed a position the ECB can take to the Fed’s bearings without hiking or ending its liquidity programs altogether. Also of interest in the policy authority’s comments was the suggestion that exchange rates should reflect fundamentals. While this isn’t exceptionally remarkable; it reminds us that there is a G7 meeting tomorrow that will focus on the FX markets.


British Pound Can’t Rally on MPC’s Avoidance of Stimulus as Economic Data Cools

Between the ECB and BoE’s rate decisions, the British group’s decision to hold was far more remarkable. In the weeks leading up to the meeting, speculation stimulus increase was bolstered by Posen’s advocating further bond purchases. Instead, the BoE remains mum and is probably in a three-way split in its vote. In the meantime, annual factory activity hit a 16-year high and home price growth slowed to record low.


Japanese Yen Pushes Easily to a 15-Year High against Dollar as BoJ Comes Up Short on Intervention

Where is the BoJ? That is what currency traders were likely wondering when USDJPY dropped below 83 and proceeded to forge new 15-year lows. This pair has completely unwound the reaction to intervention and ignored the expansion in the BoJ’s policy effort this week (a far more active effort than the Fed). The Vice Finance Minister may have had something to do with it, saying intervention wasn’t for competitiveness.


Canadian Dollar Positioned for Volatility as Employment Data Looks to Compete with US NFPs

The Canadian dollar plunged across nearly all of its major counterparts Thursday. And, interestingly enough, this was a move that wasn’t heavily influenced by visible, scheduled event risk. Building permits dropped to their lowest level since February 2009; but does this undermine growth? Tomorrow’s employment data could carry more weight in this respect. Domestic consumption is vital to growth and interest rate speculation.


Australian Dollar Retraces from a Record High as Capital Markets and Risk Appetite Stall

After the dramatically bullish reaction to Thursday morning’s employment data, the Aussie dollar would maintain its advance through the early trading hours and test a technical record high against its US counterpart. However, this extraordinary effort wouldn’t hold up for long. Without risk appetite to provide support or global rates at least showing a level of stability, the Australian currency’s benefits will inevitably dissipate.
By John Kicklighter, Currency Strategist