US Dollar, Major Currencies Held Hostage by Indecisive Risk Appetite | Learn Forex | GoLearnForex.com

Major Currencies vs. US Dollar (% change)

09 Oct 2011 – 14 Oct 2011

Talking Points

• EUR: Choppy Volatility Likely to Persist Before Key EU Summit
• GBP: BoE Meeting Minutes in Focus as Traders Gauge QE Outlook
• JPY: Yen Crosses Reflect Risk Trends, USDJPY Still Range-Bound
• CAD, AUD, NZD: Prices Remain Anchored to Stock Performance

Risk sentiment trends continue to dominate price action as most major currencies remain closely correlated with the S&P 500. The Japanese Yen continues to be somewhat of an exception, with USDJPY stuck in a narrow range amid lingering intervention fears while the currency’s other pairings continue to see it play a safe-haven role.

Broadly speaking, sentiment trends remain driven by the twin themes of the slowdown in the global economic recovery and the Euro Zone debt crisis. On the former front, the outlook has brightened a bit as US economic data continues to show signs of improvement. Indeed, a Citigroup index tracking US data surprises has hit the highest level in nearly six months.

Importantly, this has not dismissed the reality that global expansion as a whole is likely to slow, with economists (as polled by Bloomberg) slashing expectations for Euro area performance this and next year while China’s growth rate hit the lowest in two years in the third quarter. On balance, this means that only one of the three leading engines of worldwide economic growth is on a path to improvement, reinforcing our expectation that the pace of global recovery will moderate but a double-dip recession is unlikely.

Looking ahead, the Federal Reserve Beige Book survey of regional economic conditions as well as an updated reading on business confidence from the central bank’s Philadelphia branch will be important in shaping the evolution of the growth outlook. The third-quarter round of corporate earnings releases is likewise an important component to of fundamental data flow over the near term, with 70 S&P 500 companies still on tap to report results.

Turning to Europe, the way forward is convoluted as jittery traders cling to often conflicting headlines ahead of the upcoming October 23 meeting of EU policymakers. The sit-down was set as the deadline for the emergence of a comprehensive plan to contain sovereign stress at last weekend’s G20 finance ministers’ summit, which sparked elation among investors until Germany quickly dismissed the possibility of crafting something complete on such a tight time frame as a “dream”. Another rumor of an agreement along the Franco-German axis to expand the EFSF bailout fund to 2 trillion euro has now surfaced, but nothing says that whatever optimism this produces will not be promptly overturned as news-flow shifts gears again.

In sum, while the possibility that a truly game-changing agreement that defuses the time-bomb that is the EU debt fiasco seems unlikely, the markets appear to be hoping against hope for such an outcome to materialize. This has translated into a willingness to completely overturn sentiment trends at a moment’s notice, making it difficult to map out a trajectory of the majors for the remainder of the week.

Scanning one-off event risk, minutes from October’sBank of Englandpolicy meeting are of note. Bank Governor Mervyn King and company rebooted the quantitative easing program earlier this month, and the markets will be keen to learn the voting pattern on the rate-setting MPC committee that produced the unforeseen outcome with an eye on what can be expected down the road.

EURO

Source: Bloomberg

Key Upcoming Events

BRITISH POUND

Source: Bloomberg

Key Upcoming Events

JAPANESE YEN

Source: Bloomberg

Source: Bloomberg

Key Upcoming Events

CANADIAN DOLLAR

Source: Bloomberg

Key Upcoming Events

AUSTRALIAN DOLLAR

Source: Bloomberg

Key Upcoming Events

NEW ZEALAND DOLLAR

Source: Bloomberg

Key Upcoming Events

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

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