The statistics on the US dollar are ghastly. Through the month of May, the world’s most actively traded currency plunged 547 pips, or 6.5%, on a traded weighted basis to its lowest level this year. With the momentum building, there was no shortage of reason to sell this currency.
Fundamental Outlook for US Dollar: Neutral
- Consumer confidence rises to an eight-month high, but is this optimism warranted?
- Durable goods orders jump and housing statistics continue their slow improvement
- Despite a positive revision to first quarter growth, the US economy trudged through its worst six months in 50 years
The 1Q GDP revisions confirmed the country’s worst six month period of economic activity in 51 years. Policy officials warned that a recovery could be pushed back into 2010. Rising national debt levels intensified speculation that the US sovereign debt rating was in jeopardy. And, once again, international calls to abandon the US dollar as a reserve currency were amplified. All of these are legitimate concerns, but none of them are new or immediate problems. This is what is important to remember heading into the coming week. Risk appetite will no doubt have its influence on the greenback, but a dense list of high-level event risk (from the US docket and abroad) will cast the battered currency in a more objective light as we see where the US really stands in the global scale between economic depression and recovery.
Referring to the dollar’s own calendar, fundamental traders will respond to a wide range of proven market movers. The scope of the list will cover nearly every facet of the US economy and will therefore better qualify speculation as to whether the there are signs of “green shoots.” This is a misleading and perhaps an overused term that alludes to the beginning signs of growth. Like the rest of the world, the United States if far from growth, and what speculators benchmark now is the deceleration in the pace of contraction. Topping the list for potential impact (as it usually does) is the monthly non-farm payrolls report. The consensus from Bloomberg’s survey economists projects another 521,000 jobs lost through May. It is first interesting to note that the spread on expectations has grown to be relatively tight (forecasts range between a 450,000 and 600,000 drop). More important though is the pace of job losses. If this figure prints as expected, it would mark the second month that the rate of payroll reductions slowed and it would be an overall significant improvement on January’s record breaking 741,000. As the leading indicator for economic health, a steady improvement of this caliber could single-handedly convert a bulk of the market to believers that the world’s largest economy is on track to recovery ahead of its major trade partners.
Nothing to scoff at itself, the rest of the data crossing the wires over the coming week will cover the health of the individual sectors in a little more detail. Consumers—whose spending accounts for 70% of the economy—will be evaluated through personal income, spending, and credit figures. If we are to expect a genuine economic recovery before the end of the year, we should see a turn in these figures relatively soon. From the business side of things, the ISM manufacturing and services sector surveys are due on Monday and Wednesday, respectively. The outlook for factory activity has been negative for 15 months now and services seven months, though the reversal since the end of 2008 has been relatively aggressive. Finally, the pending home sales figure will be a lagging indicator for the housing market, but consistent improvements from data in this group will eventually pan out to a true revival.
Alone, the round of US data will gauge how the American economy is performing compared to last month, last quarter, and last year. However, for currency traders, the forex market is a relative game in which the pace of US growth and returns must be set against its global counterparts to gauge the strength of the dollar. In this capacity, we must set the dollar against the backdrop of the major releases from other economies next week.
By John Kicklighter, currency strategist, DailyFX.com
