Dollar Posts Severe Technical Break, Do Fundamentals Agree?

Though the dollar traced out relatively small moves against most of its counterparts through the opening day of the trading week, it suffered a serious blow where it counted most. The most active pair across the majors Monday was the clearly EUR/USD. The benchmark FX pairing’s rally (0.5 percent) easily overtook the 1.3000-figure traders were watching so carefully and seems to portend the activation of a more lasting bull trend.

The Dow Jones FXCM Dollar Index seems to present the same for the greenback – a bearish tumble in its immediate future. This index of the currency’s strength presented a threatening break of a rising trend channel that has sustained its bullish drive since the September 14 reversal. A technical move of this magnitude certainly piques a trader’s interest, but is it the making of a serious trend?

The first wave of doubt should come from a quick look at the market’s most dominant fundamental theme: risk trends. Referring to the easily measured US equity index futures/CFDs, we find that the S&P 500 retreated sharply from the near-one month highs through Monday’s close. As a safe haven currency, the dollar would normally have been propped up by such a move.

We could attribute the disconnect to a preoccupation amongst dollar traders by the obvious standoff between the White House and House of Representatives over the US fiscal impasse, but that has more weight for negative sentiment than fear of a rating downgrade – thereby, net dollar bullish. More likely, underlying risk trends were level and equities were expressing volatility without a clear trend.

Trend development in general will be exceptionally difficult for any market heading into the end of the year. Volume figures (on equities) are at decades last seen in over 10 years and volatility figures are at 5-year lows (for equity and FX markets). If participation and fear are tempered, it would take a serious fundamental driver to keep markets moving.

Euro Rallies Against All Counterparts Despite ESM Downgrade, Investor Losses on Greece
Was there anything particularly encouraging about the Euro-area’s financial and fundamental health Monday or over the past weekend? Looking at the currency’s performance to start the week, you’d assume that would have to be the case. The euro rallied against every one of its major counterparts ranging between a barely-registered, advance against the pound up to a 0.6 percent rally against the Canadian dollar. As such, this performance spanned safe havens and higher-yielding investment currencies, so the strength was clearly innate rather than a "risk flow."

The first fundamental development to consider was Moody’s downgrade of the ESM bailout program after the market close this past Friday. The market wasn’t given proper time to acclimate to the ratings adjustment, but it seemed the euro hardly needed the buffer as the negative implications of a less credit worthy rescue program didn’t seem to bother euro this past session. While that driver simply lacked influence, Greece’s call for participation in the bond buyback program was an active driver.

The provisions for 30.2 to 32.2 on short-term and 38.1 to 40.1 percent on longer-term bonds are losses for investors anyway we cut it. Yet, that is losses for existing investors and a boon for future interest. The Greek 10-year bond yield responded positively enough, dropping 7.7 percent. Meanwhile, some media sources were interpreting German Chancellor Merkel comments as a warming towards writing down Greek debt in the future – something she has spoken out against.

Australian Dollar Wades into RBA Decision
Heading into the RBA rate decision, there is a heavy consensus for a 25 basis point (0.25 percent) rate cut. Overnight swaps (a good market representation) are putting the odds at a 90 percent probability and Bloomberg’s forecast shows 20 out of 28 economists expect such a move. This sets up a very one-sided market where such an outcome becomes essentially fully priced in. That creates a skew for the actual outcome.

A rate cut could have less of an influence on the Australian dollar in a selling wave because the assumption of such an outcome was already heavily priced in. Alternatively, a hold (which would normally be a non-even) could actually be a rally point for Aussie dollar traders as those anticipating a selloff would be forced to cover their short position. Our attention shouldn’t wane after the RBA though. 3Q GDP is due tomorrow.

Canadian Dollar: Why the BoC Decision Could be Far More Market Moving Than RBA
There is little doubt when we are told that an RBA rate decision will be market moving, but few would immediately believe the same assertion made of the Bank of Canada’s rate decision. Why? Because the central bank hasn’t changed its benchmark rate since September 2010 and officials have shown little interested in moving them now. However, that is where the market moving potential comes in. If few people have positioned ahead of time in a speculative or hedging effort to prepare for a change in policy, an actual move could lead to a big move.

Swiss Franc Tumbles, EUR/CHF Surges after Swiss Banks Introduce Negative Rates
The average daily range for EURCHF is a tepid 15 pips. This past session though, the pair rallied nearly double that and the range on the day was close to 50 pips. This ‘aggressive’ and persistent move was no doubt supported by the euro’s buoyancy; but its real strength came from a franc tumble which was spurred by news that UBS and Credit Suisse was introducing negative rates on franc accounts – a capital diverter.

British Pound Rallies in Sympathy Move to Euro, More Prone to Reversal
There were a few fundamental drivers for the pound to work on this morning. The November manufacturing PMI printed a better than expected 49.1 (which is still in a contractionary phase) and the Funds for Lending Scheme report showed little benefit is being found from the open-ended stimulus. More likely, the sterling was likely following the euro. Regardless, if this was the catalyst, the pound may find itself over-extended.