Dollar Rally Cut Short As Risk Evaluated And Data Disappoints

Euro Held Back As CPI Raises Specter Of Ongoing ECB Rate Cuts• Japanese Yen Torn Between Questionable Safety, Recession Reminders• Canadian Dollar Takes Lead On Com Bloc With GDP Numbers

Dollar Rally Cut Short As Risk Evaluated And Data Disappoints
It was bound to happen – especially with substantial event risk drawing so close. The three-day rally that pulled the US dollar up from its two-and-a-half month lows was finally put off its pace Wednesday as currency traders gauged their exposure to the events due in the days ahead (G20 meeting and NFP release ) while once again taking stock of consequential data crossing the economic docket.

With little more than 36 hours to go until the Group of 20 leaders convene in London, traders are still trying to discern which currency is best positioned to benefit from a positive outcome and which offers the greatest level of protection from a crushing disappointment. While the dollar can weather both scenarios given certain consequences, the focus and uncertainty on the US, its dollar and policies make it a risky bet. We have outlined the situation over the past few days; but circumstances are ever-changing and policy makers are taking advantage of the market’s and media’s attention to air their demands, tout their efforts and offer their forecasts ahead of the gathering. There was yet another round of this grandstanding today. Reflecting the resistance building in the Euro Zone, French Finance Minister Christine Lagarde said the country’s representatives would walk out of the April 2nd meeting if their “deliverables” are not met. While this was largely focused on beneficial, regulatory changes; it is nevertheless telling of the attitude that these officials will take to a conference that has historically fallen short in developing policy.
Along, different lines Japanese Prime Minister Taro Aso has perhaps shown his lack of confidence in a global solution by announcing he has set his ministers to work to develop a third reiteration of financial stimulus by mid-April. This is a reasonable effort however considering the likelihood that officials will be able to come to an agreement over a one-day meeting and with respect to forecasts for global growth. The World Bank lowered its growth forecast for 2009 down to a 2.1 percent slump while the OECD projected a 4.3 percent plunge for its 30 member group along with expectations for 36 million unemployed within the G7 by the end of 2010. With all this under consideration, we have to remember that the US is the world’s largest economy and likely has the most to gain from global coordination. Should the world’s largest economies work together to correct some of the underlying, global problems, it could more surely lead to positive results and remove the defacto responsibility that the United States has taken to correct a world-wide problem in addition to its own troubles. And, lest we forget, there is the Russian and Chinese proposal for a new world reserve currency. If this suggestion is shot down, it could still hurt the dollar by stalling discussion on other topics.

When everything is said and done, the G20 meeting could have a substantial and lasting impact on the dollar’s future - but so too will the more mundane data that continues to cross the wires. The indicators released this morning reminded market participants that the worst of the recession has not passed us. Topping the docket this morning, the Conference Board consumer confidence report ticked higher for its March reading; but not enough to make up for that fact that it is just off a record low. Americans saw employment and conditions deteriorating to new lows through the month, but were slightly less pessimistic about the future. This is likely due to hope placed in the government’s efforts to date, but such influence through general data has not yet been confirmed. The S&P/ CS housing market inflation report was more straightforward on its negative bias with its 25th contraction on year-over-year data to a record low. Looking ahead to tomorrow, ISM manufacturing and construction spending data will redefine growth forecasts; but we should also take count of the preliminary jobs data ahead of Friday’s NFPs.
Euro Held Back As CPI Raises Specter Of Ongoing ECB Rate Cuts

We were reminded today that there is more event risk on Thursday than just the G20 meeting. For the euro, there is an event that can carry just as much market moving potential and ultimately provided a clearer sense of direction: the ECB rate decision. Still a day away, we were reminded by of the pending policy announcement by around of key data that will no doubt factor into President Trichet and company’s decision. Further diminishing the argument that inflation is a realistic concern for the medium-term time frame the central bank monitors, the Euro-Zone CPI flash estimate for March cooled to a 0.6 percent pace of year-over-year growth – its slowest pace on record. And, while inflation was subtracted from the equation, the intensity of the Euro Zone’s recession was leveraged. Germany, Europe’s largest economy, reported joblessness jumped 69,000 through the current month for the worst contraction in four years and fifth consecutive increase. With the unemployment rate rising to a nine-month high 8.1 percent, it is hard not to forecast a deepening recession for Europe and the need for further easing from the ECB.
Japanese Yen Torn Between Questionable Safety, Recession Reminders
Yen traders have historically ignored Japanese economic data because the currency was playing a larger role in the FX market (recently as a funding currency for the carry trade or a safe haven). Ever since the 4Q GDP numbers rocked confidence in the currency’s ability to offer shelter from the financial torrent though, we have seen a greater interest in fundamentals. Today’s flow reminded investors that Japan is not immune to the global financial and economic crisis; and moreover that it stands to perhaps suffer far more than many of its large counterparts. From a wide range of data, the consumer was one of the key focuses. The jobless rate rose to a four-year high 4.4 percent through February while household spending dropped for a 12th consecutive month and income contracted at its fastest pace in five years. The other highlight was factory activity. The first quarter Tankan figures generated significant surprise. The confidence gauge for manufacturers fell to a record low according to the survey owing to the severe domestic recession and plunge in export demand. This report led to an immediate 125 pip drop in USDJPY.
Canadian Dollar Takes Lead On Com Bloc With GDP Numbers

Over the past few weeks, the approach of the Group of 20 meeting has led FX traders to focus on the most liquid currencies and more vocal members of the assembly. However, we should not overlook the opportunities and threats within the commodity bloc. Considered to be two of the strongest economies in the global rout, both Canada and Australia showed there is always reason to doubt today. From Canada, January GDP dropped 0.7 percent to maintain the longest recession on recent record and print the worst year-over-year contraction since 1991. The Aussie dollar responded to RBA Deputy Governor Battellino’s forecasts for negative growth over 2009 and a round of concerning data. Private credit growth slowed to its worst pace since 1994 while retail sales dropped the most since July of 2000.