The Dow Jones FXCM Dollar Index has held just below critical resistance and fresh two month lows since risk-trends were rejected despite the otherwise "better-than-expected" October payrolls. Taking a look at the chart of the Dollar Index, we find the big-ticket 10,000 figure is complimented by the 100 and 200-day moving averages – considerable weight to any technical trader.
However, the most remarkable technical read on the greenback is also a very telling fundamental consideration: the average true range (ATR). Measuring the average of the currency’s daily range (on a rolling 10-day basis), we find that the dollar has carved out the smallest rate of activity since high and low data have been recorded – so since at least January 2011. Altogether, that tells us a significant swell of volatility is soon at hand.
These measures of activity on the technical level are mirrored with what we have seen fundamentally. As the US benchmark equities have led a questionable march higher for riskier assets over the past months and years, we have also seen the FX Volatility Index slide to lows not seen since before the financial crisis in 2008 (the index is currently at 7.41 percent).
The standard volatility indicators are both measures of insurance costs against adverse price movements and more elementally "fear" gauges. Therefore, when these measures of risk rise, it is generally in response to a more active move towards risk aversion. That is a strong factor for the greenback – if and when it happens. Yet, we have seen the volatility measures continuously trend lower against a trend of more obvious troubles in growth trends, financial crises and fiscal imbalances.
Though it doesn’t necessarily have to jump start a watershed event in speculative positioning, a sudden return of volatility through the immediate future is a particularly credible threat. That being said, this may be a pickup in activity that defies the common convention that a big swing in price action necessarily translates into risk aversion (a disconnect that would most likely bypass the traditional volatility readings).
Markets are currently positions such that they reflect the "tail risk" (low probability, but high impact potential) that the euro-area crisis will hit critical mass and / or the US will hit the wall that is its Fiscal Cliff. Recently, however, EU officials have managed to by Greece a few more weeks and lawmakers on both sides of the US political spectrum have voiced confidence in a budget resolution. Winding down those factors could boost risk trends – and likely will. The critical question is how much is the market weighing this possible short-term relief against the obviously, long-term problems…
Euro Finds Little Bounce from Greece Hole Plug, Spain Rescue Rumors
European officials are struggling to put out fires as the flames come progressively closer with each swell. The newswires have been crowded by headlines that are clearly aimed at provoking fear in a rapidly deteriorating financial situation in the eurozone.
Yet, through all the countdowns to Greece running out of money, the questions over whether the Spain will ask for an official rescue and other (lesser) concerns that have intensified this past week; the euro has posted limited – though consistent – downside progress. In contrast, recent positive developments / speculation have yielded just as little return in the euro’s favor. Between a bill auction yesterday and allowance of Asset Backed Securities use as collateral, Greece looks like it will be able to cover the bond maturity that happens on Friday.
On another front, rumors were running in the speculative circles that Spain would soon seek a bailout. Neither risk ( EUR/USD) nor anti-risk ( EUR/AUD) pair closed in the green for the euro. Perhaps the market is awaiting today’s event risk: Greek and Portuguese 3Q GDP. There is no misinterpret ting these reports.
British Pound Rallies Briefly After CPI Data, Right Back Towards 1.5850
In quiet trading conditions, traditional fundamental releases – that would otherwise struggle for face time in market influence against larger themes like risk trends – can have a bigger impact on price action. That was the case with the pound and CPI data this past session. The headline CPI reading for October rose 2.7 percent on a year-over-year basis – a pickup from the lowest reading since November 2009. GBP/USD and other pound pairs responded with a brief bounce, but it wouldn’t hold. The BoE will not be hiking rates anytime soon.
Japanese Yen: Risk Aversion May have Wavered but the Yen Hasn’t
We have seen a strong risk aversion move this past week – though it may have been uneven across the markets – and the yen has certainly benefit the safe haven seeking. The only problem is that policy officials are trying to push the currency lower to offer some relief to the economy through exports.
It is likely doubly frustrating that with recent hints over the past 24 hours at a possible bounce in risk trends that the yen has continued to gain ground against all of its counterparts. We have to wonder at what point, Japanese authorities will mimic the SNB.
Swiss Franc at Two Month High Versus Euro, 1.2000 in Sight
SNB President Jordan must not be happy. Two months ago, the EUR/CHF exchange rate finally picked up from the central bank’s force-imposed 1.2000-floor without the express influence of policy authority. Tail risk on the euro-crisis seemed to ease and the safe haven flows reversed. Today, however, we are only 35 pips off that floor once again. After this brief jaunt, the market may realize the SNB will have to push it higher.
Australian Dollar Losing Steam on Rate Outlook, Bullishness Deflating
The Australian dollar seems to be relentless. The currency has climbed against the dollar and yen despite risk aversion moves from US equities this past week. And, despite the even footing, it has also advanced against fellow safe haven – the New Zealand dollar. The market hasn’t fully committed to risk aversion, but the Aussie’s true strength is the reduction of expected rate cuts. Well, that rebound seems to be fizzling out…