Dollar Traders Will have to Determine Currency’s Safe Haven Role with Friday’s GDP Revisions, Bernanke Commentary

The economic docket was relatively light for the US dollar; but that wouldn’t prevent the currency from drifting off its fundamental mooring. The favored reserve fiat would put in for its second consecutive decline. Looking at the trade-weighted Dollar Index, the current pattern for price action looks very similar to the development from last week. Not surprisingly, the underlying market conditions that contributed to the brief retracement and general congestion back then are present now. It is first important to establish that the 48 hour decline from the greenback is not yet a bear trend. Rather, this move is more appropriately labeled as a correction that falls within a range that has developed through the week. The intraweek swings the currency has put in for this past week were short-term reactions to fundamental catalysts; but it has been a tangible struggle to gain a footing on a clear trend. We can trace this hesitancy back to underlying investor sentiment itself. Today, we see the Dow Jones Industrial Average slip below the 10,000 mark while keeping within the previous session’s coverage; and US-based crude oil reversed for a second day. In conjunction with the stalled EURUSD, this lax correlation between markets suggests risk appetite has tempered.

From today’s fundamental offerings, the lack of volatility (much less a trend) should not come as a surprise. On the docket, the initial jobless claims figures for the week through August 21st eased more than expected to a 473,000-annual clip. The positive implications this data may have had were summarily offset by the report that 310,000 filings were added to continuing claims owing to extended benefits – a poor reflection of the recovery effort by employment. The same questionable outcome is afforded to the MBA’s mortgage foreclosure reading for the second quarter which slipped from 4.63 to 4.57 percent; and yet it is still just off its record high. This data could easily be construed to support a bearish outlook; but the fundamental gravity heading into the end of the week is too great for this second tier data to significant alter traders’ expectations. Instead, the ranks are waiting to absorb and interpret tomorrow’s top event risk. On the docket, we have the revision of the second quarter GDP reading. Normally, the market’s interest stops with the first reading; but the magnitude of the expected revision and intensified speculation of a stalled recovery in the second half of the year has made this second reading perhaps more influential than the first. Given the disappointing housing, manufacturing and inventory developments over the past weeks; it shouldn’t surprise that there is talk of a 1.0 percent reading or lower. The other major event for the day is the Jackson Hole Symposium. A meeting of mind on monetary policy, this forum has been used to delivery forecasts in the past. There is fringe speculation that Bernanke may lower his growth outlook or event announce new stimulus.

For dollar traders, the outcome of this collective event risk is actually much more complicatedthan establishing whether it is good or bad for the economy. Normally, the impact this wave has on risk appetite would impact the dollar as a safe haven. Yet we have seen this role diminish somewhat recently as greenback has deviated from other capital markets. That said, the more panicked the crowd; the more they need shelter.