US Dollar Holds to Uptrend as Risk Appetite Remains on Edge

The greenback ended Monday mostly higher across the majors, leaving the US dollar index to continue trading above key trendline support, suggesting further gains may be in store. There was no data on hand, and for what it’s worth, event risk will remain light on Tuesday as well. Indeed, the release of US consumer credit doesn’t tend to be a major market-mover, but the news may be important as a gauge for economic developments. As it stands, consumer credit growth is anticipated to have contracted by $3.0 billion in February, after rising by $1.8 billion in January. We saw that consumers’ use of credit fell sharply throughout Q4, and while we did see Q1 2009 start out on a slightly better note, more substantial increases will need to be registered before anyone can say that loan availability and demand has truly normalize.

The big piece of event risk for the US dollar will not come until Wednesday though, when the Federal Open Market Committee (FOMC) meeting minutes will be released. In March, the FOMC left the fed funds target range at 0.0 percent - 0.25 percent but the big surprise was that they officially announced quantitative easing efforts. Since this information has already been revealed, the release of the minutes may not be very market-moving, but they will likely add to indications that the FOMC will leave the target unchanged throughout much of 2009 and that they will continue to use the central bank’s balance sheet in an effort to improve credit conditions. The one thing that may capture the market’s attention is the FOMC’s long-run projections for growth, unemployment, and inflation as revisions that indicate that the outlook appears to be even worse than previously anticipated could hurt risk appetite throughout the financial markets, and thus lift safe-haven currencies like the US dollar. However, if the revisions go unchanged, traders may shrug-off this once critical release.

Australian Dollar Consolidates Ahead of RBA Rate Decision

The Australian dollar has spent much of its time since Friday consolidating gains versus the US dollar between 0.7085-0.7200. With key event risk on hand overnight, we could see a break. According to a Bloomberg News poll of economists, the Reserve Bank of Australia (RBA) is anticipated to leave their cash rate target unchanged for the second straight month at 3.25 percent at 00:30 ET on Tuesday, but with Credit Suisse overnight index swaps fully pricing in a 25 basis point reduction, there is significant “surprise” potential. After the central bank’s last meeting, RBA Governor Stevens said, “Together with the substantial fiscal initiatives, the cumulative decline in interest rates will provide significant support to domestic demand over the period ahead,” suggesting that further reductions were unnecessary. Since then, though, data has shown that Q4 GDP unexpectedly fell negative by 0.5 percent, the first decline in eight years. Overall, an “unexpected” rate cut is likely to weigh AUD/USD below immediate support at 0.7085, but the extent of those declines will hinge on Stevens’ statement. Indeed, regardless of whether or not we see a rate cut tonight, signs that the RBA is considering cutting the cash rate target again further down the road could trigger AUD/USD declines toward the psychologically important 0.7000 level, or even trendline support at 0.6950. On the other hand, if Stevens suggests a neutral stance, the Australian dollar could bounce back above 0.7200.

Euro, British Pound Tumble Versus US Dollar, EUR/GBP Holding Above Key Support

Following a morning of disappointing European data and comments from European Central Bank Governing Council member Ewald Nowotny who said that 1 percent is the ECB's benchmark rate limit, the euro ended Monday down against the US dollar, but virtually unchanged versus the British pound. Indeed, EUR/GBP has continued to test rising trendline support that dates back to October 31, 2008, as well as the 100 SMA at 0.9041, and these levels denote a proverbial “line in the sand” for the pair, as a push below would indicate a bearish break. Whether EUR/GBP makes this break lower or manages to stage a recovery may depend upon Thursday’s key UK release, because for the first time since the summer of 2008, the Bank of England is expected to leave rates unchanged.

Indeed, both Credit Suisse overnight index swaps and a Bloomberg News poll of economists reflect forecasts that the BOE will leave the Bank Rate at an all-time low of 0.50 percent at 7:00 ET on Thursday. A look at their March 5 policy statement shows that the BOE’s Monetary Policy Committee (MPC) expects both growth and inflation to fall lower in coming months and also announced a new 75 billion pound asset purchase program, which included the buying of medium and long-term gilts. Ultimately, how the British pound responds will likely depend on two factors: whether or not the BOE asserts that they want to avoid cutting the Bank Rate to zero, and whether or not they indicate that they want to expand their quantitative easing (QE) efforts. Signs that the BOE is open to reducing rates further or signs that they will increase their gilt purchases could weigh heavily on the British pound, while the opposite (steady rates, no QE expansion) could provide a boost to the UK’s currency, especially against the euro. This is due to the fact that the ECB has left the door open to additional rate cuts, as well as their own quantitative easing efforts.

Canadian Dollar Lags Across the Majors as Ivey PMI Unexpectedly Slips

The Canadian dollar was one of the weakest of the majors on Monday, and looking at USD/CAD in particular, the pair bounced from key trendline support, which connects the October 14, 2008, January 2009 and March 2009 lows. The Loonie had already started the day on a weak note, but only after Canadian data was released at 10:00 ET was USD/CAD able to break above 1.24. Canada’s Ivey Purchasing Managers’ Index (PMI) is unexpectedly slipped to 43.2 in March from 45.2, compared to expectations for a rise to 47.0. This marks the fifth straight month that the index has held below 50, reflecting a further contraction in business activity. Overall, this PMI release adds to evidence that the decline in oil prices has taken its toll on Canadian economic growth, and that the Bank of Canada is likely to leave rates at a record low of 0.50 percent throughout much of 2009.

Terri Belkas is a Currency Strategist at FXCM.