US Dollar And Dow Lose Their Strength As Bailout Optimism Hits A Wall

The dollar was pushing higher through the Asian and European sessions owing to a rebound in risk aversion. Like is has been with most of the policy proposals that have been instituted since the credit crisis evolved into a financial crisis and then into a global recession, doubt has been caste over the effectiveness of lawmakers efforts to push through a bailout for US auto manufacturers. As we suggested yesterday, the proposed $15 billion rescue package would fall well short of the firms’ simple need for liquidity; and would mark a weak transition in stimulus from Wall Street to Main Street. In a letter to Senate Banking Committee Chairman Christopher Dodd, Fed Chairman Ben Bernanke ruled out the possibility of the central bank extending loans to the ailing car makers on the grounds that it was “unclear” whether the firms would be able to post sufficient collateral. This is a clear sign from the central banker that he will put a cap on opening the coffers to every industry that is suffering from the global recession. In addition, Bernanke suggested bankruptcy reorganization was still an option. Everything considered this may ultimately be the outcome anyway. However, with consumer and investor sentiment hanging in the balance, can policy officials afford to let this important sector fail? Should the bill not make it through, Americans may grow increasingly pessimistic over the health of the economy as well as employment trends and curb spending, while banks and investors will question the solvency of established firms and further horde cash.

While the ebb and flow of risk aversion was dominating price action through the first half of Tuesday, the economic calendar was offering a few secondary indicators for fundamental traders to work with. The leading IBD/TIPP economic confidence survey offered another damper on growth expectations just ahead of the holiday season. The December reading dropped to 45.0, reversing the first positive reading from the survey in November after 19 consecutive declines. A more common anchor on the US economy, the housing sector found further confirmation of an ongoing recession. Pending home sales contracted 0.7 percent through October. This is hardly surprising considering the month-to-month volatile in this report and the lag is sees compared to existing sales; but it still highlights one of the key hurdles to the eventual recovery of the US economy. Until banks pass rate cuts on to consumers, employment improves and confidence returns, housing and growth will contract.

British Pound Retreats As A Flood Of Data Sets The Pace For The Worst Recession In The Western World

A fully-stocked, economic calendar would keep the British pound under pressure throughout the European session Tuesday. With readings on consumer spending, housing, factory activity and trade, fundamental traders were given a full measure on the health of the economy; and the reading was not encouraging. Well before capital markets opened for trade in London, proprietary readings for retail sales and housing activity set unflattering records. The British Retail Consortium’s retail survey reported sales dropped 0.4 percent through November. Following up on the previous month’s 0.1 percent contraction, this marked the first back-to-back contraction in spending since records began in 1995. At first glance the RICS House Price Balance report for the same month would suggest an improvement in the battered sector as the headline reading rose to a nine-month high -76 percent. However, the more important, sales component would suggest otherwise when it reported the worst level of activity since records began 32 years ago. Keeping the bearish sentiment going during the regular business hours, the visible deficit grew more than expected to 7.75 billion pounds – keeping the balance near its quarter century low. Finally, the Office for National Statistics would report a greater than expected 1.4 percent contraction in manufacturing through October – extending the worst period for factory activity since 1980. Altogether, these readings make a strong case for the United Kingdom ultimately suffering the worst recession in the developed world – a distinction that will grow in importance when global risk appetite begins to improve.

Euro Strength Backed By German Confidence Is Questionable

Aside from its dollar and yen pairings, which were guided by broad risk sentiment trends, the Euro would mark a steady rise through Tuesday’s session. This modest but tangible advance was rooted in improvements to consumer and investor confidence. From the economic docket the German ZEW survey for December revealed the second consecutive gain in investor sentiment. However, the bullish implications of this report would end there. While the indicator did rise, the gauge has held below water for 17 consecutive months. What’s more, the current conditions gauge (a more objective measure at extremes) marked a new three-and-a-half year low. Until the drop in the euro, regime of rate cuts and drop in oil translate into a clear recovery in economic activity, skepticism will be the rule of thumb. The other supposed boost to sentiment would come from news that Germany would return 7.5 billion euros to tax payers after the Constitutional Court ruled sidelining commuter subsidies was illegal. This will act as an additional stimulus infusion for Germany; but its effectiveness will be limited as it will be paid out over three years.

Bank Of Canada Cuts Its Benchmark 75bps And The Loonie Responds

The Canadian docket would offer top event risk for the day in the Bank of Canada’s rate decision. Over the past few months, the Canadian dollar has been able to hold back far greater declines on signs the domestic economy would hold up far better than its counterparts (third quarter GDP rose 1.3 percent) and the global financial crisis was having a limited impact in Canadian markets. Naturally, this has helped bolster the loonie’s long-term fundamental appeal as it would suggest the economy could be one of the forerunners in the eventual recovery from the global recession. However, the greater-than-expected 75 basis point rate cut today from the BoC suggest the Canadian benchmark may reach zero before the rout ends and leave Canadian assets on the same levels as its contemporaries. What’s more, already at a half-century low 1.50 percent, the target bank rate may reach zero much faster than many economists and traders had initially thought. In the statement that accompanied the decision, Governor Mark Carney and crew remarked that the economy was “entering a recession” and that “further monetary stimulus” may be warranted – leaving the door wide open for further, large cuts.

Terri Belkas is a Currency Strategist at FXCM.