There is little denying it: the US dollar is tumbling. There is only one step below the performance that the greenback is experiencing now and that is ‘free-fall.’ The difference between these two states? A free fall would denote irrational selling that would soon reach its peak and turn the market to stability or a reversal. Therefore, the benchmark currency may actually be experiencing the worst scenario because its losses are steady. Even technical traders should be aware that momentum is the key to gauging the eventual deceleration and inevitable turn for the US dollar. That being said, fundamentals can certainly accelerate this process; but does the scheduled and exogenous event risk on tap for next week seem like it will curb the dollar’s losses or add to them?
First and foremost, it is import to establish that the greenback’s primary catalyst is not risk appetite trends but rather speculation that the Federal Reserve is on track to expand stimulus – not that it would matter too much at this point because investor optimism has maintained a bullish bias since the beginning of September. With this in mind, we scan what we have on the calendar that can spark speculation surrounding monetary policy plans. The most pertinent driver therefore could be the range of Fed speeches that are spread throughout the week. It will start off heavy with Q&A and a statement on fiscal sustainability from Fed Chairman Ben Bernanke. The Board of Directors may decide stimulus on a consensus system; but the chair holds particular sway over opinions. Later in the week, we will see the Fed’s Fisher, Hoenig and Tarullo. Interestingly enough these three have shown a hawkish lean at one point or another in the past; so if they fold to the need for more stimulus; it will be construed as far more likely that easing is an ultimate outcome.
When reviewing the economic data scheduled for release over the coming week, we need to view it with the same stimulus angle that we will watching the Fed commentary from. Notable improvements in the economic forecast could go a long way towards dissuading the central bank from expanding its already massive $2 trillion stimulus plan and therefore flooding the system with dollars while simultaneously putting the nation’s finances in a further stressed situation. There is a lot to review including: factory orders, pending home sales, consumer credit, ADP employment change and ISM services. All of these are meaningful in the bigger picture framing. However, since this is a speculative reaction we are looking at, the NFPs carries the most weight as it is considered an easy to interpret gauge of economic activity. That being said, this indicator is due on Friday; and a lot can happen between the start of the week and that release.
And, while it is pretty clear that the market is fully preoccupied with the stimulus debate at the moment; we should not merely ignore the implications of risk appetite trends. If the capital markets find traction once again, will the dollar leverage its losses or will sentiment help by restraining the need for a government safety net. Then again, if confidence collapses, won’t it amplify the need for help?
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