Dollar Drive To 1.0250 Against Aussie Helps Cap EUR/USD Below 1.3000

The dollar is showing us a contrasting performance. If we were to just take our assessment from EUR/USD, it would seem that the greenback is under pressure. The benchmark pair has put in for its first back-to-back advance in two weeks – though the pair has clearly found itself unable to overtake the closely watched 1.3000 level despite the effort.

In fact, perhaps we should view this pair’s progress as one of restraint – the euro (which outperformed all of its counterparts the past two days) was tempered by an otherwise strong dollar. For a better sense of the US currency’s own strength, we can look to the Dow Jones FXCM Dollar Index which advanced another 22 points through Tuesday’s close for a third consecutive, daily advance. It’s worth noting that we haven’t seen a four-day climb for the Index since the series through May 25 - during the most prolific bull trend since the November surge.

To upgrade this bullish drift into a robust and durable trend, we need serious fundamental support. Given the dollar’s place in the risk spectrum, the push that would leverage the Dollar Index above and beyond 10,000 would likely be the same that tipped the S&P 500 and Dow Jones Industrial Average into a collapse (below 1425 and 13,335 respectively): market-wide risk aversion. We have yet to see the event risk that can disrupt the stimulus-bred confidence behind riskier assets.

The docket certainly fills out, however, as we press deeper into the week, month and quarter. In the upcoming session, we test the market’s confidence / interest in broader growth trends. A round of service sector activity readings is due for the US, eurozone, UK, Australia and China (already released weak readings).

Investors and analysts seem to pay more attention to the manufacturing readings as more distinctive measures of trade (many policy officials around the world still believe they will export their way to growth), but the service measures are arguably better measures for domestic growth. This is particularly true for the US economy where most jobs are service sector side. So this is both a good reading of the trend for US GDP as well as a lead into the Friday’s NFPs.

As we keep watch for catalysts that can tip the scales of investor sentiment, it is important to keep the fundamental backdrop for risk trends in mind. For the ‘return’ column, the 3Q US earnings session looms large. Meanwhile, the aggregate yield for the majors’ 10-year government bonds has dropped for seven consecutive days (and is just off of recent record lows).

The last time we have seen easing of this magnitude and consistency was back in May and July-August of last year - during severe declines for US equities and a stark rally for the dollar. What is holding us back this time around? Volatility. Despite the prevalence of fundamental problems, risk is stubbornly anchored on stimulus hope.

Euro: Is this Two-Day Advance a Trend Shift?
The euro posted gains against all of its major counterparts Tuesday, the second consecutive session with which this has occurred. What is driving this move? Standard data (employment statistics Monday and factory inflation yesterday) are hardly up to the task. Risk trends can’t claim responsibility as currencies like the Kiwi and Canadian dollars would have likely outperformed the lower-yielding and fundamentally-troubled euro. That would suggest that there is a level of relief rally in fundamentals.

Recent headlines were hardly supportive of the shared currency, however. Spanish Prime Minister Rajoy shot down rumors that the country was close to asking for a full bailout, while Moody’s said it was still studying Spain’s credit rating. Meanwhile, Greece’s finance minister said he was unsure that the country would have a deal with the Troika by the EU summit. These are not bullish developments, yet bond yields and default swaps are showing improvement. But for how long?

Australian Dollar Moving Purposefully Towards 1.0175
The Aussie dollar took a significant hit this past session thanks to the RBA’s rate cut. Though swap markets suggested a significant contingent of the market was already pricing in a 25 bps cut to 3.25 percent, there was clearly a significant position of the market (including myself) that though it less likely. Looking at updated rate forecasts, there is still remarkable speculation of further easing (a 75 percent probability of 25bp cut in November and outlook for 90 bps of easing over 12 months). A negative rate bias certainly hurts a carry currency, but it carries more weight with pairs that aren’t heavily risk-biased (AUD/NZD and AUD/CAD). For AUD/USD and AUD/JPY, we need risk aversion to support momentum.

British Pound Quickly Retraces Gains, GBP/USD Right Back to 1.6100
The sterling was putting in for a decent advance against the safe haven dollar through the morning session Tuesday, but the gains were completely unwound through the end of the day. GBP/USD can’t seem to find lift off of the 1.6100 level. The trouble with a fiscal-focus instead of growth push by the government and the euro-area’s troubles are both potential catalysts. But the most bank for our buck on cable is risk trends.

Japanese Yen Lower on Mixed Day for Risk Trends
Investor sentiment was generally mixed on the day. US equity indexes ended the day with mixed results, the euro was universally higher but the Aussie dollar was sharply lower (driven by event risk). Yet, despite the mixed picture, the yen suffered almost universally against safe haven and carry currency alike (with exception for AUD/JPY). Perhaps investors are taking the new Ministers’ threats of manipulation seriously.

Swiss Franc: Are Yields and Sight Deposits Enough to Keep EUR/CHF Off 1.2000?
Recently, we have seen in the SNB’s data that sight deposits (good measures of safety demand) dropped through the week of September 28for the first time since May. Furthermore, we have seen yields on the shorter end of the Swiss yield curve (5 year and below) trend back towards positive territory. This mix of sentiment and return seems to suggest EUR/CHF can hold off 1.2000. Yet, like euro stability, it is unlikely to last.