US Dollar Rally May Find Added Fuel In Global Slowdown Fears

By Ilya Spivak, Currency Strategist

MajorCurrencies vs. US Dollar (%change)

30 Apr 2012 – 04 May 2012

Talking Points
  • Most Major Currencies Tied to Risk Trends, Macro Trends in Focus
  • Spanish, Chinese Economic Data Key to Global Growth Perceptions
  • US Dollar Well-Supported on Haven Demand Amid Greece Concerns
  • British Pound May Find Another Non-Event in BOE Rate Decision
  • Australian Dollar Vulnerable on Jobs Data Downside Surprise Risk

Most of the major currency pairs continue toshow significant correlations with the MSCI World Stock Index,suggesting that broad-based risk appetite trends remain dominant asdrivers of price action. This puts thematic macro-level concerns– specifically, the durability of the US recovery and itsability to offset headwinds from Europe and China facing globalgrowth – squarely at the forefront. The US economic calendaris relatively quiet, with headline event risk clustered at the endof the week as PPI and UofM ConsumerConfidence readings cross the wires on Friday. This putsthe onus on evaluating the extent of downward pressure.

The week is off to a rocky start after weekend elections in France and Greece propelled candidates opposed to the status quoof austerity-focused EU debt crisis management into positions ofpower. The installation of Socialist candidate Francois Hollandeinto the French presidency has been well-telegraphed in opinionpolls leading into the election and so seems unlikely to be ameaningful driver of price action. Meanwhile in Athens, themainstream New Democracy (ND) and Pasok parties that support thesharp fiscal consolidation Greece agreed to as part of the EU/IMFbailout program failed to win enough votes to form a rulingcoalition without at least one anti-austerity partner.

Not surprisingly, this is weighing heavily onsentiment across financial markets and pushing thesafe-haven US Dollar (ticker: USDollar ) higher as traders fret about the increasingpossibility that Greece will renege on its obligations. In the worst casescenario, this may see it ejected from the Eurozone and possiblythe EU altogether, an unprecedented development that falls largelyoutside the realm of the forecast-able in terms of its practicalimplications for financial markets.

Dismal economic data fromthe Eurozone periphery may provide risk aversion with additional fuelamid signs the recession in the world’s second-largesteconomy (when taken collectively) is deepening. Spanish GDP figures are in focus, with expectationssuggesting the annual growth rate slowed to the weakest sincemid-2010 in the first quarter. The May edition of the ECB MonthlyReport and updated set of European Commissiongrowth forecasts will likewise inform the markets’ outlookfor the depth of the slump plaguing the region well as thelikelihood that that the central bank central bank will act to helpbackstop sliding output.

The Asian piece of the puzzle emerges in theform of a hefty Chinese economic dataset to be released Thursday and Friday, with medianforecasts pointing to mixed results. April’s Trade Balance report is expected to see export growth slow tothe weakest in three months, an outcome likely reflecting a slumpin demand from Europe, while CPI figures show the inflation rate eased over thesame period. While such outcomes may prove broadly supportive forsentiment in that they would hint at the likelihood of additionalPBOC stimulus, a firmer IndustrialProduction reading may offer a countervailingforce.

The AustralianDollar has scope to underperform amid an alreadydifficult environment for risk-linked currencies afterApril’s EmploymentReport comes across the wires. Expectations call forthe economy to shed 5,000 jobs but survey data suggests hiring contracted at the fastest pace sinceDecember, when headline figures showed the economy lost 36,600jobs, so the threat of a downside surprise that stokes RBA cut betsfor June appears significant.

The British Pound stands apart from its major counterparts, withrate expectations seemingly taking a leading role over risk trendsas the primary driver of price action. This argues for thecentrality of the Bank ofEngland rate decision this week, where Mervyn King andcompany appear unlikely maintain the policy mix as-is. Thebank’s penchant for staying mum when no changes areimplemented may make for a non-event however, with traders waitingfor next week’s inflation report to inform their outlook inearnest.

EURO

Source: Bloomberg

BRITISH POUND

Source: Bloomberg

JAPANESE YEN

Source: Bloomberg

CANADIAN DOLLAR

Source: Bloomberg

AUSTRALIAN DOLLAR

Source: Bloomberg

NEW ZEALAND DOLLAR

Source: Bloomberg

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya , e-mail ispivak@dailyfx.com . Follow Ilya on Twitter at @IlyaSpivak

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DailyFX is the forex news and research arm of FXCM, Inc (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

Original Article: http://www.dailyfx.com/forex/fundamental/article/fundamental_trends_monitor/2012/05/09/US_Dollar_Rally_May_Find_Added_Fuel_in_Global_Slowdown_Fears.html

DailyFX is the forex news and research arm of FXCM (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

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