Dollar Finds Relief Before Serious EUR/USD, AUD/USD Breakouts

After a persistent wave of risk buying in the capital markets, questionable fundamental developments and a critical technical break for the world’s most liquid reserve currency; the dollar finally put in for a bullish day. The bounce from the greenback was predictable given what the alternative would allude to. For the Forex market’s preferred safe haven to extend its selloff (enticing purely from a technical perspective as the US Dollar Index broke a two-month rising trend channel), we would likely require an aggressive risk appetite rally.

That is a tall order given the ground the markets have already covered in pursuit of boosting risk exposure and the sizable fundamental uncertainties ahead of us. From a trader’s perspective, extending the dollar’s bear run would likely require serious bullish breakouts for global equities, EUR/USD, AUD/USD and other risk-sensitive assets. Developing a lasting trend into the end of the year requires far more fundamental support than what we currently have.

The break in the risk appetite fever this past session came on a heady mix of technicals, fundamentals and market conditions. The multi-month trendline resistance from major equity indexes (S&P 500, DAX, Nikkei 225, etc) aligns nicely with the 1.3150 range top for EUR/USD and 1.0500 range extreme for AUD/USD. From a fundamental perspective, the docket over the past 24 hours offered up a disappointing ADP payrolls figure (lead in to Friday’s NFPs) and dubious ISM service sector showing (taken with the factory report as a proxy for overall GDP).

With the Fed decision scheduled next week and Fiscal Cliff headlines keeping market participants on edge, there it’s difficult to commit to adding exposure. The biggest disconnect though is the low liquidity environment which naturally draws markets into congestion when there isn’t a constant push.

Euro Tempered Ahead of ECB Rate Decision
It bears pondering whether there is a large contingent of the FX market that is still positioned for an imminent Greek crisis. With the buyback program underway and the EU evaluating the long-awaited aid payment next Thursday, it seems as if the bid for more time is the most likely path for the euro through the end of the year. This shifted baseline scenario is not a mystery to the broader market nor has it just recently dawned on the masses.

In other words, the rally that the euro has enjoyed these past few weeks likely finds much of its strength from the relief that the region’s most immediate hazard has been put on eyes for a while. The side effects of that assumption are a tempered pace of climb moving forward and the reality that a confirmation of what was already expected will have a limited impact. In the meantime, the newswires can stir euro volatility via the ECB rate decision.

Given the open promise of the unused OMT program and the distraction with the political side of the euro-area, expectations for the central bank are flat-lined. That said, a blank slate leaves the market wide open to surprise. Though it has very little weight in swaps or amongst economists, we should be wary of the possibility of a rate cut. It would hit return rather than promote stability.

Australian Dollar Finds Another, Temporary Boost from Jobs Data
The Australian docket has been all over the place in terms of support for the Aussie currency, but its bearing hasn’t changed. Through an RBA rate cut and in-line GDP reading (shaded by the weakest personal consumption figures in two-and-a-half years), the high-yield currency has held at multi-month highs against its funding currency counterparts (US dollar and yen). This morning’s release was easier to rally behind as employment unexpectedly rose by 13,900 and the jobless rate actually dropped to 5.2 percent.

Scrutiny would show all the jobs were found in temporary positions, but that doesn’t necessarily through off a preoccupied crowd. Where we go from here, though, moves away from this week’s questionable round of event risk. Now, we are back to underlying risk trends. And, sentiment looks like it needs encouragement.

Japanese Yen: BoJ Deputy Governor Suggests More Stimulus Will be Discussed
How much further can Japanese policy officials (central bankers and politicians) move the yen by threats alone? The campaign promises have been made by Noda and Abe, while the BoJ’s threats have long been priced into the market. We may already be at the point where the markets are on hold until something material actually changes for economy and currency.

BoJ Deputy Governor Nishimura has piqued the market’s interest by suggesting that the group will be looking into whether further stimulus (possibly via new methods) is necessary to stabilize the economy. We have seen reticence previously, but their growth outlook has consistently declined and political pressure is building.

British Pound: Country Between Downgrade and Recession, BoE on Deck
As expected Chancellor of the Exchequer George Osborne was forced to lower his growth forecasts and push back his targets for fiscal balance in the Autumn Statement this past session. While it may have been predictable, it is still fundamentally discouraging for the sterling.

The government admits to choking growth (with no intention of changing its push) and now its aim to avoid a credit rating cut is at risk. Fitch said that it will be reviewing the nation’s rating in 2013. In the meantime, the BoE is up to bat. Will they explore "new" stimulus measures?

New Zealand Dollar Rallies After RBNZ Holds Rates
There was little surprise from the RBNZ’s ultimate policy decision Wednesday morning. The central bank maintained the benchmark lending rate at 2.50 percent. Looking to swaps pricing for market positioning heading into the decision, there was an approximate 10 percent probability of a cut which likely lead to some changes in position.

Yet, the kiwi’s advance after the news seemed to play out far beyond that modest expectation. The commentary that accompanied the decision hardly spoke to future, near-term hikes. Perhaps the kiwi has overrun its fundamentals.