Forex: Dollar Ready for Fed, GDP with EUR/USD at 1.3500

Dollar Ready for Fed, GDP with EUR/USD at 1.3500
Euro Eases Ahead of Spain 4Q GDP Despite EFSF Auction
New Zealand Dollar: Poor Inflation Data to be Weighed by RBNZ
British Pound Advance Comes on BoE Reports of Fading Currency Use
Japanese Yen Crosses Climb as Stimulus Meets Risk Trends
Australian Dollar Rebounds as Rate Expectations Jump
Gold: Best Measure for Market’s Reaction to Fed Stimulus Call

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Dollar Ready for Fed, GDP with EUR/USD at 1.3500
The Dow Jones FXCM Dollar Index (ticker = USDollar) finally backed off its run to six-month highs, the day before the 4Q US GDP and the Federal Reserve’s rate decision is due. Prior to Wednesday’s slide for the greenback, the currency managed to drive a four-day consecutive rally – matching the strongest run for the Index in three months. The pullback is appropriate in reverence to the considerable influence the upcoming event risk carries over, not only the US dollar, but the entire financial sector. Perhaps this round of event risk will be influential to remedy the fundamental divergence in the dollar’s gains against key counterparts (Japanese Yen, British pound and Australian Dollar) at the same the benchmark capital market’s conviction measures (the S&P 500 and other equity indexes) push higher. In other words: perhaps this is the catalyst that finally reinstates general risk appetite trends – whether supportive of or resistant to speculative sentiment.

Heading into the big ticket headline fodder, the first piece of event risk to hit the wires will be the advanced (first) reading of fourth quarter GDP. The consensus estimate for annualized growth measure is calling for a substantial cooling of the previous reading’s 3.1 percent pace of growth to a much more reserved 1.1 percent clip. That would mark the slowest measure of growth for the US since the first quarter of 2011. Yet, how market moving would an in-line reading prove? We have to assume that the economist forecast has been priced in by the market (especially after the IMF and World Bank downgraded their respective growth forecasts for the country). A substantial miss is likely necessary to spur risk aversion – which counterintuitively would generate demand for the safe haven dollar. More likely, a reading near the consensus will sideline the capital markets and benchmark currency as the focus (and hopes) turns to the Federal Open Market Committee’s (FOMC) rate decision.

In theory, relative growth should be a vital pricing mechanism for the value of a currency; but we find that is far from the case in practice nowadays. Relative stimulus has both the effects of guiding market-wide risk taking as well as creating an environment where currencies are (perhaps unintentionally) devalued by expansive policies. Amongst the major banks, the Federal Reserve is the most liberal (the BoJ won’t move until 2014) in its efforts – a reality that has no doubt contributed to EURUSD’s advance as the ECB withdrawals LTRO and is ignored by the USDJPY at multi-year highs. The $85-billion-per-month effort that the US central bank has adopted along with economic guidelines (6.5 percent jobless and 2.5 percent inflation rates) was put into place only last month. Therefore a material change in January is highly unlikely. That said, the market will be open to any nuanced change in language that spells an end (or reduction) to stimulus before the end of 2013.

Euro Eases Ahead of Spain 4Q GDP Despite EFSF Auction
All market participants will be tuned into the far-reaching implications of the United States’ GDP reading and FOMC rate decision. And, even if these two fundamental sparks come off without a distinctive shift in current expectations; they may nevertheless dampen the influence of key event risk on the Euro’s docket. Early in the European session (08:00 GMT), Spain’s preliminary (first) reading of 4Q GDP is due. This will be the first the major core and periphery Eurozone members to report its economic performance – and will thereby carry a lot of weight to further expectations. Beyond the ‘first plunge’ position, Spain remains one of the key threats to a steady Euro-area recovery through 2013 (along with Cyprus and Greece); so its health will be particularly important. In the meantime, it is worth noting that this past session; the EFSF rescue fund sold €5 billion in 5-year bonds at a rate of 1.25 percent. A large sale of longer-dated paper denotes confidence and funding.

New Zealand Dollar: Poor Inflation Data to be Weighed by RBNZGiven the growth readings and the FOMC rate decision earlier in the day, it may be easy to forget that there is a Reserve Bank of New Zealand (RBNZ) rate decision on deck. It will be a boon for those looking for volatility that all the US data will have cleared by the time that this particular event risk is met. Like the Fed outlook, the New Zealand policy meeting is expected to end with no significant change to bearing. However, there is greater expectation behind this meeting and sensitivity to subtle language changes. At the last (4Q) CPI reading, we found a serious shortfall on inflation pressures which led the kiwi to a quick tumble. Will this easing turn RBNZ Governor Wheeler dovish? If he holds, is it kiwi bullish?

British Pound Advance Comes on BoE Reports of Fading Currency Use
The sterling advanced against key counterparts this past session (dollar, euro and yen). This strength in particularly is interesting given a report that was released by the Bank of England at the same time. According to their twice-a-year Forex report, the pound was a component to only 16.6 percent of FX transactions through October versus 17.2 percent in April. To play a reserve currency, the sterling needs more traction…

Japanese Yen Crosses Climb as Stimulus Meets Risk Trends
We have seen various deviations in the influence of risk trends that has seen specifically the yen crosses march forward at the same time there has been a lack of consistency for the appetite of yield (something seen with AUDUSD’s decline). Yet, that correlation was returned this past session when most risk benchmarks were realigned. Watch USDJPY’s reaction to the Fed’s moves after the BoJ committed to 2014.

Australian Dollar Rebounds as Rate Expectations Jump
Where Japanese officials have confidence that they can manipulate their currency, Australian Prime Minister Gillard remarked this past session that her government can’t alter the Aussie dollar. This could be considered a reflection of reality to most; but yen cross bulls, it may stand as an open invitation to bid the cross higher as officials won’t intervene near these levels.

Gold: Best Measure for Market’s Reaction to Fed Stimulus Call
There is a ‘competitive currency devaluation’ effort at work amongst the world’s largest central banks – whether they admit to it or not. Seeing one currency advance over the other because its central bank is less proactive on stimulus is one way to measure this factor. To see the bigger picture (how influential overall stimulus is), gold’s value is a good measure. If a steady Fed isn’t impressive, gold will fail to gain traction.

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