Dollar Regains Traction, Drives EUR/USD Below 1.2800

Despite the remarkably consistent climb for the S&P 500 – normally a reflection of rising risk appetite – the dollar revived its bid for multi-year highs Tuesday. The positive correlation between reserve currency and risk benchmark remains in place – indicative of a market that doesn’t have strong convictions for either greed or fear. Without a strong bearing for speculative appetite though, both the dollar’s and equity market’s climb grow increasingly difficult to sustain. For the greenback, a jolt of strength is particularly important now. This past session, EUR/USD marked a critical break below 1.2800 – blatant support for the past 9 months. Yet, a technical move (not even one from the FX market’s most liquid pairing) doesn’t itself secure follow through. With the Dow Jones FXCM Dollar Index stationed below 11,000, conviction is essential.

Maintaining a constant vigilance for events or themes that can change the market’s collective sense of risk appetite, the IMF’s updated forecasts for growth did little to support optimism. Their outlook for 2013 global expansion was downgraded from April’s 4.0 percent projection to 3.8 percent. Both the advanced and emerging market economies’ future was downgraded – a clear dampener for expected returns and capital flow. This could be construed as a sign that the market will seek safe harbor via the dollar and its liquid markets, but it carries a secondary connotation as well. With the US growth forecast lowered to 1.7 percent (from 1.9 percent), a weaker environment for job creation can add weight to speculation that the Fed ‘Taper’ will be pushed back.

Considering the USDollar is just off three-year highs and S&P 500 futures have advanced seven consecutive days (matching the longest rally since September 2009), it is clear that the market wasn’t accepting either extreme scenario. However, stimulus and its influence on risk trends will be revisited in the upcoming session. On deck, we have scheduled the FOMC minutes from the June meeting, a speech from Fed Chairman Bernanke on monetary policy and a 10-year Treasury note auction. The presser after last month’s rate decision means we are unlikely to find fresh ideas in the minutes and auctions have been deteriorating with little impact. But Bernanke can change the market tone.

Euro Drops as IMF Growth Outlook, Italy Credit Rate Downgraded
There were few positive headlines for the euro this past session, and it showed in the currency’s performance. The euro lost ground against all but the Swiss franc Tuesday with the heaviest selling coming after the IMF issued its updated growth forecasts. With its head already below water, the region’s future was further downgraded to a 0.6 percent contraction expected for the current year – a deeper trough than the 0.4 percent drop expected in April. EURUSD dropped nearly 100 pips following the news. Meanwhile, Greece’s latest last-minute funding approval and Portugal’s cabinet reshuffle to maintain the government seem to have inspired limited optimism. And, to keep bulls on their back foot, ratings agency Standard & Poor’s downgraded Italy to ‘BBB’ – two steps above ‘junk’.

British Pound Slips Despite Data, Forces GBP/USD to Three-Year Lows
Data for the pound this past session wasn’t particularly flattering, but neither did it renew concern of a triple dip recession for the UK. The headline data was the £8.49 billion deficit and 0.8 percent drop in manufacturing activity (both bigger than expected) for May. However, most notable was the NIESR GDP estimate for June. Though an independent measure of economic activity, the series’ three-month average – to correspond to the quarter – is at the highest level since September 2010. The official 2Q GDP data is due on July 25.

Japanese Yen: Officials Look to Change CPI Measure, Wages to Ensure Inflation
There aren’t many effective ways to escalate the stimulus efforts in Japan, but officials may not need to. The currency continues its downtrend (the yen crosses rising) without a strong move to bid risk. However, two ways Japanese officials looked to leverage the deflation fight this past session was to announce a change in the preferred CPI target (to the measure excluding energy and food costs) while Economy Minister Amari called for minimum wage increases at a government panel. Looking ahead we have the BoJ rate decision, but there is little chance of change.

Australian Dollar Climbs Alongside ASX, Discounts Chinese Data
There has been considerable volatility for Aussie dollar traders but not much consistent momentum –bullish or bearish. The Australian currency advanced against most counterparts Tuesday, but finds itself in the red this morning. The slow rise in equity markets with the ASX 200 extended its advance in early Wednesday trade catered to the high yield appeal. That said, the June Chinese trade report dampened trade optimism. Weaker-than-expected trade hurts Chinese GDP (as well as their demand), and the 9.3 percent drop in imports is a direct concern.

New Zealand Dollar Tuesday’s Top Performer as Rate Outlook Leverages Risk
The New Zealand dollar rallied against all of its counterparts Tuesday. Tentative risk appetite trends offer amplified returns for currency whose central bank is seen hiking its benchmark rate multiple times over the coming year. According to Credit Suisse swaps, the market is was pricing in at least two 25bp rate hikes by the RBNZ over the coming 12 months. That said, the near two-year high for hawkish forecasts (70 bps) eased modestly this morning following Finance Minister English’s warning that a rise in rates would lead to a kiwi rise and economic trouble.

Gold Climb Slows Ahead of $1,265, Futures Open Interest Climbing
Bulls are attempting to make progress in reviving gold from its entrenched bear trend. The precious metal rose 1.2 percent this past session – virtually a mirror of Monday’s performance – but the metal floundered noticeably through the European and US trading sessions. It is worth noting that we haven’t seen a three-day advance from gold since April 22 – the corrective phase following one of the biggest routs for the commodity in modern history. Paired that with the $1,265-resistance that has held the market back since the late-June tumble, and it will be difficult to mount the necessary conviction to continue the charge towards $1,300. For fundamental support, the dollar’s bounce draws from the ‘alternative asset’ appeal. That said, the downgraded IMF growth forecasts paired with concerns over the Chinese credit bubble and reemergence of Euro-area troubles can contribute to a ‘cheap hedge’ view of gold. Meanwhile, for those watching positioning, futures open interest continues to climb – now up 15 percent from four-year lows set on the same day gold plunged below $1,300.