Dollar, S&P 500 All Clear after the Fed? Far From It

Dollar, S&P 500 – All Clear after the Fed? Far From It
British Pound: What Did Governor Carney Promise BoE Doves?
Euro Traders Look for Further ‘Transparency’ from ECB
Canadian Dollar Gains More Traction from US GDP than Own Growth
Australian Dollar Extends Longest Tumble in 8 Years
Gold Volume Hits a Month High, Activity Levels Hits 4 Month Low

Dollar, S&P 500 – All Clear after the Fed? Far From It
A tension-racked market absorbed two of the most important pieces of event risk released in six weeks this past session…and the result was the US dollar and S&P 500 frozen like deer in headlights. The combination of the first reading of second quarter US growth (2Q GDP) and the Federal Open Market Committee’s (FOMC) rate decision presented the most capable projections of economic health and monetary policy for the world’s largest economy since the central bank gave credibility to the Taper fears in its June policy meet, forecasts and press statement. If the heft of the event risk was so significant and projects directly on investors’ primary concerns, why didn’t the markets take off – bullish or bearish? Should we consider this a sign that there is no longer reason to fear near-term bouts of volatility and reversal?

To answer these questions, we first need to look over the event risk. First on the wires was the GDP figure for the three-month period through June. The 1.7 percent annualized pace of growth was significantly better than the 1.0 percent clip expected with the consensus. If this were the only facet to this important piece of data, it could have tipped the debate on the timing for the Fed’s Taper time table (the first reduction in the $85 billion-per-month QE3 stimulus program) as a sign of diminished need. However, the data itself was complicated by a significant downward revision to the 1Q figure (1.1 from 1.8 percent); and perhaps more problematic, the central bank rate decision was due later the day.

Heading into the policy meeting, traders knew that this would be an event that would not provide an explicit schedule of the Fed’s plans moving forward. Not only does the central bank commit itself to flexibility to respond to incoming data, but this is also an off-quarter gathering that includes neither updated forecasts nor the Chairman’s press conference. So, the market would have to do with the regularly-released statement – a well-crafted article of obfuscation. Combing through the document, there were notes that doves (those expecting a Taper at the end of the year or later) jumped on like the suggestion that inflation ‘persistently’ below the two percent target could pose risks and a rise in mortgage rates. Yet, there was a balance of tame hawkish (September Taper) rhetoric with notes that growth would pick up and employment improve with diminishing downside risks. The debate on semantics can go on forever; but realistically, this is close to status quo. Maintaining the June lean though is a deliberate move from a policy body that knows investors are debating a September time frame. Andthat can be tacit approval.

As we move forward, it is critical to assess whether this data has already factored into the market’s course; and therefore, we have seen the extent of the stimulus withdrawal speculation for now. It is highly unlikely that speculation on such an important element of the market’s current fundamental value is stable. On the contrary, this event risk only further leverages the debate. A spark can easily set the markets in motion. In the upcoming session, the ISM manufacturing report will try its hand. The true threat to peace though is Friday’s NFPs.

British Pound: What Did Governor Carney Promise BoE Doves?
Keeping the week of heavy event risk going, the Bank of England (BoE) will gather for its August policy meeting today. Six months ago, we would expect little from the event as the group was maintaining a policy of ‘wait and see’ and a ‘no change’ outcome required no remarks. Things have changed however. In an effort to bolster transparency, the BoE released an unexpected statement after its July 4 hold and it is expected that this will become the standard for communication going forward. Much more interesting though is shift in the Monetary Policy Committee (MPC) vote referenced in the minutes from the last rate decision. According to the transcript, the two steadfast doves that regularly called for more bond purchases abandoned their mission. They do not do so lightly, so this should lead us to consider whether new Governor Mark Carney introduced a discussion for an alternative to bond purchases. Stimulus in most forms could hurt the sterling.

Euro Traders Look for Further ‘Transparency’ from ECB
The market may have turned down the sound on the Euro headlines, but the event risk continues at a remarkably consistent pace – and the updates aren’t particularly encouraging. This past session, the IMF reported in its assessment of Greece that the country has a financial hole of an additional €11 billion through 2015 and the need could grow if the country misses the perennially optimistic forecasts. As a bright spot from the economic docket, German employment figures kept the unemployment rate near its two decade low. Yet, that can actually create problems when we compare it to a record high jobless rate for the entire Eurozone also reported. For the upcoming session, top euro event risk is the ECB rate decision. Like the BoE, the European Central Bank has made moves towards transparency. That could mean more explicit forward guidance in the absence of an actual change in policy.

Canadian Dollar Gains More Traction from US GDP than Own GrowthThe Canadian economy grew 0.2 percent in May – less than expected by economists. The moderate pace for the month bolstered the year-over-year rate of growth to 1.6 percent, but this is far from the robust performance we would expect to support an investment currency status. At this rate, the progress needed to move up the Bank of Canada’s time frame for a rate hike is not there. From a direct fundamental impact, the US GDP figures likely carry more weight for the market. A steady pace of expansion supports export demand.

Australian Dollar Extends Longest Tumble in 8 Years
With Wednesday’s close, AUDJPY has dropped for six straight tradingdays. That matches the most consistent bearish pressure for this pair since January 2005. And, this weight isn’t isolated to the yen cross. The Australian dollar dropped heartily against all of its major counterparts this past session. What makes this particularly interesting is that this move comes despite a level bearing for risk trends. What is supplementing the steady bearing for carry interest to keep the Aussie under pressure? A virtual certainty in rate forecasts for an RBA rate hike next week.

Gold Volume Hits a Month High, Activity Levels Hits 4 Month Low
Given the level of event risk and the end-of-month flows this past session, there is little surprise that trading in gold picked up. That said, the increase in trading didn’t translate into a meaningful shift in volatility – much less trend. For contrast, we find volume in futures and ETF gold trading jumped to a more than one-month high. Alternatively, the activity level (average 5-day range) dropped to its lowest level in four months. Like the dollar and S&P 500 though, we should not expect $1,350 and $1,300 to be hearty boundaries going forward.

**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

ECONOMIC DATA

GMT

Currency

Release

Survey

Comments