Dollar Breaks To 3 Year High Before Holiday, Taper Market Shakeup

The Dow Jones FXCM Dollar Index (USDollar) rallied above 10,875 this past session to break through to fresh three-year highs. This move is partly attributable to risk trends concerns – the S&P 500 has notably failed multiple times to make progress beyond 1,625 – and also has its contributions from Taper speculation. Yet we shouldn’t let the technical breakout for EUR/USD below 1.3000 and USDJPY above 100 lead us to complacency. Trades are made on the follow through, not the breakout. And, the momentum behind a bullish dollar theme is highly circumspect moving forward. Immediately ahead of us, we have a round of notable event risk – ISM service sector activity, ADP employment change and US trade. All notable for a growth update, the former two are also key NFP proxies. The national employment report due Friday presents the first update on a key Fed Taper target (the jobless rate) since the group noted their intention to taper later this year. There will be healthy doses of fear and speculation before the data hits Friday…and before that, we have a liquidity drain for the national holiday.

Euro Drops Below 1.3000 as Portugal Adds to Growing Crisis Concerns
The euro was a mixed bag this past session, but the standout move was the EUR/USD’s 0.7 percent slide below the support on recent congestion. A strong dollar was certainly a critical aspect of this move, but the euro itself would contribute to the bearish development. For traditional data, the docket was light. The Eurozone factory-level inflation figures did little to alter the assessment of health in the regional economy. Far more important was the spread of the euro crisis fire. While German Chancellor made troubling remarks to suggest Greece may not receive its full €8.1 billion aid tranche by August and that no additional debt cuts would come, the bigger headline was from Portugal. In the wake of the Finance Minister’s resignation just a few days ago, the Foreign Minister announced his exit Tuesday. As cabinet members leave, the coalition government is at very real risk of dissolution. And, a vote will likely find a more desperate nation to vote against austerity.

Japanese Yen Crosses Advance for the Fourth Day, Capital Flows On Deck
Over the past two weeks, the yen crosses have climbed between 2.0 (AUD/JPY) and 6.7 percent (USD/JPY). This clearly speaks to yen weakness rather than coincidental strength from its many counterparts. The correlation between the yen crosses and Nikkei 225 suggests there is an element of ‘risk appetite’ building up the carry position – but it is the return of stability for the local markets that is the more likely explanation for this performance. With the Bank of Japan a constant pressure against the yen, when all else is stable; the crosses will rise. Yet, a quiet backdrop will be difficult to maintain beyond the next 24 hours. With the thin liquidity conditions for Thursday’s session and the global sentiment sparks in Friday’s NFP release, fear and then sentiment winds will overwhelm the slow climb.

Australia Dollar Volatility Stirred but Trend Still Illusive after Data Run
The past 24 hours has proven a volatile period for the Australian dollar. With the RBA rate decision carrying the market Tuesday and a round of economic data this morning, there is a considerable amount of volatility. The rate decision – where the central bank held its benchmark rate at 2.75 percent – was most notable for the group’s decision to maintain its ‘scope for further easing’ language and to notably upgrade its assessment of the Australian dollar’s ‘excessive value’. The bank’s statement noted that even after a 10 percent drop, the Aussie dollar was still expensive and likely to fall further. The data this morning seemed to support a curb speculation of further rate cuts with a trade surplus at a 17-month high and retail sales rising, but RBA Governor Stevens would make it a point to reiterate his dovish/bearish outlook.

British Pound Advances Despite Business Group’s Call for Stimulus
With the exception of GBPUSD, the sterling put in for a bullish performance this past session. In testimony to Parliament, Bank of England member Tucker offered a dour assessment of economic conditions. Aside from his assessment of a bumpy recovery going forward, the policy maker warned that a help-to-buy program (form of stimulus) was unwise and that recent market volatility was a warning sign. Both a warning and a plea, business group BCC (British Chamber of Commerce) called on the incoming BoE Governor to boost credit through an increase in bond purchases and expansion of the Funds for Lending Scheme. As a balance of market interest, the Treasury auctioned off £3.5 billion in 10-year notes for a higher 2.584 percent yield (previous was 2.365 percent) but better demand (1.76 bid-to-cover versus 1.52 previously). In the upcoming session – the day before the rate decision – we have a BoE credit conditions report and service PMI survey due.

US Oil Soars for a Third Day to 14 Month High
US oil – West Texas Intermediate – has soared an incredible 5.6 percent so far this week. With Tuesday’s 1.6 percent jump, the market pushed to a nine-month high. In exceptionally-volatile trade early Wednesday, crude moved to overtake $100 per barrel and test highs not seen since May 2012. The magnitude of the move to multi-month month highs in itself is remarkable, but the heavy overnight activity speaks to exceptional market conditions. Volume on the futures markets showed the market traded around 1 million contracts through the past session – the heaviest trading since February 7, 2012. This isn’t a simple stop-clearing speculative move. Supply concerns are driving this move in the form of unrest in Egypt. Facing threats of a military-led ouster by a Wednesday deadline, Egyptian President Mohammed Morsi rebuffed threats and vowed to stay at the head of the government. In an escalation to the Mubarak protests from 2011, millions of protestors have taken to the street to demonstrate. With Morsi vowing to stay in office and the military threatening intervention, pressure on oil prices will remain.

Gold Recovery Stalled by Dollar’s Strong Rebound
An unchecked recovery effort isn’t in the cards for gold. The precious metal closed in the red following the previous two days of hearty rally. The 0.7 percent slip is hardly eye watering; but it steals all the wind from the badly demoralized bulls. Given the extent of the selloff over the past quarter, the fundamental drive to support a rally is far greater than it would be under different conditions. As such, budding troubles in the Eurozone’s periphery, the wealth erosion in higher energy prices and persistent stimulus efforts by global central banks – all weights to traditional currencies – still can’t put the metal on pace. Meanwhile, ETF holdings of the commodity dropped for the 20th consecutive trading session and volume eased back to levels from that preceded the June collapse.