US Dollar Teetering on the Edge of the Abyss after a Better GDP Release?

It was an extremely dangerous way to end the week. The US dollar has held very close to general support for some time now; but the ante was upped when steady selling pressure pushed the single currency to its lowest close on a trade-weighted basis since September 30th. We can see the same level of intensity among the individual majors. EURUSD is just below its June highs of 1.4340 while GBPUSD managed to close at a nine-month high well above range resistance at 1.6600. Despite this tremendous pressure and the relative records, this is not a definitive bearish break for the greenback. When liquidity returns early Monday morning in the Asian session, speculators will immediately go back to work on trying to jump start the next major trend. For those that have dollar exposure or are waiting for the dollar to make its move, it will be an open not to be missed.

How did we come to this point? When did the dollar’s feeble attempts to rebound from its lows give way? The currency fell 1.2 percent through Friday’s session - the largest decline and absolute move since June 23rd - following the release of what at first glance seemed to be a better-than-expected outcome for the advance reading of second quarter growth. The Bloomberg consensus was projecting a tempered 1.5 percent pace of annualized contraction following what was initially a multi-decade, 5.5 percent plunge. Given this benchmark, the 1.0 percent decline that crossed the wires seemed to be a big step closer to realizing expectations for the inevitable return of positive growth. However, just below the surface, the cracks were clearly visible. The peak of the recession marked by the previous quarter was distended to a 6.4 percent malaise that matched the worst the world’s largest economy had seen since 1980. What is far more disconcerting (but not yet fully appreciated) is that the foundation for this recovery is unstable. Of all the major categories of economic activity, only government spending was rising. Personal consumption dropped 1.2 percent, exports 7 percent and private investment 20.4 percent. Fiscal stimulus is already reaching its limits and the cries to reign in aid and work down the deficit are growing louder. Without consumer spending (which accounts for approximately 70 percent of activity), the economy will not easily be able to recover on its own power. Expect to see the terms ‘L’ and ‘W’-shaped recession used more often.

The long-term outlook is highly uncertain and certainly bearish; but come next week, market participants may not immediately be concerned with underlying trends. With the dollar backed up to a technical wall, speculators will look to either force a break or offer a modest relief rebound first thing. The longer the currency holds to its technical floor, the more violent the eventual market shift could ultimately be. There is plenty of event risk on the docket; but its influence on the critical decision of breakout or reversal is likely low. ISM manufacturing and service sector surveys, consumer credit, personal spending and income are all notable indicators; but the NFPs once again holds the greatest clout. There are many indicators that hint at stabilization and eventual recovery; but none are as truly influential and accurate as the monthly payrolls report.

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