Dollar Posts First Two-Day Drop In A Month, Risk Slow To Confirm

The Dow Jones FXCM Dollar Index (DX) dropped for the second consecutive trading day Monday. This is the first back-to-back decline for the benchmark currency since the hefty, two-day drop through June 15 – a move that notably deflated the currency’s bullish ambitions. Normally, we would expect a slide of this magnitude to match a risk-based run that actively undermines the currency’s safe haven status. That said, the major equity indexes – across all three sessions – were notably mixed and quiet for the day. This would suggest a unique weakness for the US dollar itself.

Looking to the traditional sources of fundamental drive, we had a pretty busy economic docket and rather active newswire. For data, the top headline was the tumble in June retail sales. The 0.5 percent contraction in domestic consumption through the month extends the series to three consecutive contractions (the most consistent contraction since December 2008). Yet, weakness for the world’s largest consumer and economy is generally bullish for a currency that represents the US Treasury and stands as the top global reserve. That said, neither dollar nor equities responded along the expected risk lines. In headline news, the IMF downgraded its global growth forecast for 2013 to 3.9 percent (from 4.1) and warned the eurozone crises posed a severe risk to the system. Again, this would normally cater to risk aversion. Then there was continuation of the 2Q US earnings season with Citigroup’s better-than-expected EPS which left US stocks unimpressed.

With risk trends withholding guidance, what was pushing the dollar? Without active encouragement one way or the other, the dollar finds itself in a naturally exposed position. Technically, we can point to EUR/USD’s bounce from an extreme low (a more than two-year low and the midpoint of its historical range). Fundamentally, we find that without a rise in implied volatility (risk), the negative real rates of return from the greenback put it under pressure. In the upcoming session, the headlines will pick up in importance. Earnings and June inflation figures are noteworthy, but those hoping for a stimulus boost will be watching Fed Chairman Bernanke’s testimony on policy to the Senate.

Euro Faces IMF Growth Downgrade, ECB Talk Of Dropping Seniority, Merkel Push Back
There was nothing tangible this past session to flatter the euro. The IMF’s update shaped the region as the greatest threat to global stability and downgraded its 2013 GDP forecast (0.7 percent, previously 0.9 percent while the 0.3 percent expected contraction for 2012 was left unchanged). Moving back to the day-to-day viewing of the slow-motion-train-wreck that is the crisis fight, reports Monday reflected a supposed fundamental shift in the ECB’s bailout position. Originally against delivering senior bond holders losses when a bailout is offered (as with Ireland’s banking sector bailout), unnamed officials have said the policy body is now willing to accept a distribution of losses that would very likely weigh investor confidence.

That said, eurozone finance ministers supposedly opposed the call. Also worth noting was German Chancellor Merkel’s reiteration that she would not tolerate sharing liability without common oversight – reiterating the gridlock in implementing the EU Summit vows. In the upcoming session, euro traders should watch the bond auctions and investor confidence figures. Though don’t bank on trend development.

British Pound Best Performer Monday Without Data And Record Low Yield
Though it was an extremely tight race (with the yen) the sterling was the best performer through Monday’s session. That is a rather remarkable turn for the sterling given the lack of fundamental support and even a lack of correlation to risk trends (themselves virtually unmoved). What was the pound’s source of strength? The euro. A notable rise for the shared currency against the dollar suggests the figurative bleeding from the region’s financial crisis has been staunched. That isn’t likely a lasting state for the euro however; and the sterling needs active encouragement. Otherwise, we will turn back to a reality where the 10-year Gilt yield has closed at a recent historical low. Tuesday, watch for King and CPI.

New Zealand Dollar Briefly Slides After CPI Hits A 12-Year Low
In fundamental FX trading, we need to follow what is most important to the market. Risk trends – whether they be stationary and act as an anchor or in motion and catalyst – seem to have curbed a kiwi dollar reaction to an important economic release. The year-over-year 2Q CPI figures expectations were already set low, but the 1.0 percent reading printed under the consensus and pegged the slowest rise in price pressures since 1999. RBNZ Governor Bollard (soon to be replaced) has maintained a neutral stance, but will we start to see capitulation?

Japanese Yen Tumbling Early Tuesday As Risk Advances, Azumi Speaks
With a sharp rally for the Hang Seng on Tuesday’s open, we have seen a proactive push on risk trends that was completely absence on the opening trading day of the week. In turn, we have seen a market-wide rally for the yen yesterday turn into an early wholesale tumble today. Risk appetite will guide the yen though its carry connections. Another factor that may filter through (though limit expectations here) was a warning from Finance Minister Azumi. He stated that he would contemplate the need for further stimulus after the 2Q GDP figures were released.

Canadian Dollar: Data Shows The Largest Net Investment In Canadian Assets On Record
The Canadian dollar continues to position itself fundamentally as one of the most attractive currencies amongst the majors. Between the roles as an investment currency and safe haven, we learned from Stats Canada that there was a net CAD 26.1 billion investment capital inflow into Canada in May. That is a notch for the currency’s position as an investment currency. In the upcoming session, the nation’s benchmark rate and economic/financial forecasts will receive an update from the Bank of Canada. Will they further support the loonie?