Dollar Falls as Earnings Overshadow Fed’s Raised Growth Forecasts (Daily FX)
Risk appetite has seen a sharp revival this week; and the swell has had a clear, detrimental impact on the US dollar. However, this pickup in sentiment is likely to crest soon. The question Forex traders should be asking is whether the greenback will be ready to take the reins should investment optimism once again levels off.
The Economy and the Credit Market
Risk appetite has seen a sharp revival this week; and the swell has had a clear, detrimental impact on the US dollar. However, this pickup in sentiment is likely to crest soon. The question Forex traders should be asking is whether the greenback will be ready to take the reins should investment optimism once again levels off. To answer this question, we must first understand the source of the recent bullish drive. There have been minor improvements in various economic indicators and forecasts for some weeks (including the projections from the G8 summit last week); yet these indicators have hardly raised prospects to an impending push into positive growth. Instead, market participants are likely finding their buoyancy from the start of 2Q corporate earnings season. So far, Blue chips like Johnson & Johnson, Intel and Goldman Sachs have supported signs of a broader recovery. However, this rise in revenue isn’t surprising – especially with government aid still in place. When blatant risk appetite finally settles, currencies will once again be pitted against each other for economic and financial stability. With the upgrade in growth forecasts from the FOMC today and IMF last week, the market will have to weigh economic recovery against fiscal deficits for guidance.
A Closer Look at Financial and Consumer Conditions
The true health of the financial and credit markets is overlooked when immediate sentiment is on the rise. Looking beyond the temporary fluctuations in risk appetite, most signs of underlying stability are founded on government liquidity, guarantees and special programs. The most worrisome disconnect remains the break in credit availability between the major financial participants and retail/commercial lenders. While these key financial institutions are integral to smooth functioning market, a recovery cannot take hold unless funds make it to the productive participants of the economy. It an eventual return to growth to restart things; but aid will likely be removed by then.
For a trader, value is relative. This is especially true for underlying fundamental themes like economic growth. Last week, the G8 echoed the same sentiment as the Group of Seven and Twenty before it that there are early signs that an economic recovery is underway. Forecasts for the global activity and its major counterparts were mostly upgraded. And, in these revisions, there has been a clear advantage assigned to the outlook for the world’s largest economy. The FOMC offered similarly upgrades to its own outlook. Its outlook for the 2009 contraction in GDP eased from 1.3 to 2.0% to 1 to 1.5%. In contrast, the outlook for unemployment was boosted sharply.
The Financial and Capital Markets
When investor sentiment is on the rise, prices in financial and physical assets are likely in tow. And, we certainly weren’t disappointed. In three days, there has been a dramatic correction in equities, risk-sensitive commodities, Treasuries, corporate fixed income and currency pairs with significant yield differentials. Considering the direction the markets have taken in the month prior to this week, it is safe to say that this rally is still a correction in a larger trend (though we can say the same thing of the June pullback in comparison to the March to June advance). This improved bias comes in two forms – passive and active. The passive aspect is the slow improvement in the economic outlook. The positive revisions from the IMF and FOMC are just additional support for a general drift in objective data towards the inevitable return to economic expansion. However, the speculative crowd discounted this shift long ago. The active driver is earnings data. Growing revenues promote both growth and financial stability. Eventually though, earnings will fade and the more elemental trends will be laid bare. But don’t think this is just relegated to sow improvements in growth forecasts, record deficits are starting to gather attention.
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Dollar Falls as Earnings Overshadow Fed’s Raised Growth Forecasts (Daily FX)
