Wednesday, October 29, 2008

US Dollar: Will Risk Aversion Fade Long Enough To Let Bearish US Data Take Its Toll?

US Dollar: Will Risk Aversion Fade Long Enough To Let Bearish US Data Take Its Toll?

The release of dismal US consumer confidence at 10:00 ET has sent the US dollar higher versus most of the majors, as the markets continue to seek traditional "safe-haven" assets. Will this move continue throughout the day?

The US dollar, a safe-haven asset during volatile times, has rallied since 10:00 ET today as the release of disappointing US data leaves risk aversion in play. Indeed, the Conference Board's measure of US consumer confidence plunged to a record low of 38.0 from 61.4, signaling that sentiment amongst American households is the worst in over 40 years (records go back to 1967). Looking at a breakdown of the report, it is clear that a recession in the US - which should be confirmed by Q3 GDP figures on Thursday - is being felt by consumers, as those surveyed indicated that current economic conditions had deteriorated and that jobs have become increasingly hard to get. Furthermore, their outlooks for the next 6 months indicated that they thought business conditions would worsen, fewer jobs would be available, and income would decrease. Given the nine consecutive months of job losses we've seen reflected in US non-farm payrolls, it isn't incredibly suprirsing to see consumer confidence turn so pessimistic. What is unexpected, though, is the rise in 1-year inflation expectations to 6.9 percent from 6.2 percent. This is the highest level since July, when commodities were at their peak, and these indications that consumers still anticipate that prices will rise despite the rapid drop in energy and food costs puts the Federal Reserve in a tough position, especially since they are forecasted to slash rates by 50 basis points on Wednesday to 1.00 percent.

Conference Board US Consumer Confidence (Monthly Chart)

US Dollar: Will Risk Aversion Fade Long Enough To Let Bearish US Data Take Its Toll?

Source: Bloomberg

Looking at the market's reaction, US stock markets were the first to respond to the news, as the Dow Jones Industrial Average pulled back from its intraday highs. This subsquently led the US dollar and Japanese yen to climb higher amidst flight-to-safety and deleveraging.

Dow Jones Industrial Average (Intraday Chart)

US Dollar: Will Risk Aversion Fade Long Enough To Let Bearish US Data Take Its Toll?

Source: Bloomberg

Nevertheless, the move doesn't seem likely to continue throughout the day. Focusing on GBP/USD, the pair has run into support at 1.5550, which has prevented further declines. If we see price manage to hold within this wedge formation throughout the day, the bearish US economic data could finally start to weigh on the greenback.

GBP/USD (30-Minute Chart)

US Dollar: Will Risk Aversion Fade Long Enough To Let Bearish US Data Take Its Toll?

DailyFX

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