Dollar Presents Greatest Breakout Risk Four Months Ahead of NFP's

There is a clear divide in the dollar’s performance so far this week. Weakness against the ‘investment’ currencies and strength against the others shows us the divide. The greenback is a safe haven currency in a market that isn’t pining for liquidity. We can see that clearly enough in the Dow Jones Industrial Average’s (Dow) refusal to budge from its 150-point range perched dangerously above another feeble level of support. That said, the risk of a shift in speculative positioning is more palpable now than it was a few months ago. Not only is leverage holding at record highs, while trading volume in the traditional equities market this past week drop to a 15-year low, but we have already seen a redistribution of risk around this critical benchmark. Given the tumble in the Deutsche Bank carry index, torrential outflow from the emerging market and even unwinding in Fed front-run trades (US Treasuries and mortgage-backed securities); we are looking at dry dynamite.

A potential tide change, however, is not something to be traded. The dollar has benefit from the surrounding markets’ repositioning, but the true fear that would be presented in a systemic exit from ‘risk’ is what the currency needs to extend its progress. The next serious catalyst to this theme is Friday’s labor data as the market has essentially priced in the September 18 Taper. Looking beyond the first move, and realizing the OECD’s fears of the US central bank’s withdrawal of support causing panic with a consistent disarming, would offer the ideal environment.


Japanese Yen Crosses Rally but Trend as Uncertain as Nikkei 225 Climb
The yen crosses are up across the board so far this week. There are two considerations to take account of for these pairs: the level of risk appetite, and the level of carry the crosses provide. Following the lead of US Treasury yields, we have seen the developed world’s sovereign level rates soar over the past weeks. While this is the growth-led carry traders look for, it nevertheless provides an increase in return. The real boost though comes via risk appetite trends. The Nikkei 225’s surge Tuesday forced a bullish breakout that looks a lot like USD/JPY’s.


Euro: OECD Eurozone Growth Forecasts Improve but Uncertain Remains
The OECD (Organization for Economic Co-operation and Development) updated 2013 growth forecasts, and Europe was generally the benefactor. Against a moderation in expectations for the US and China, Germany and France enjoyed hearty upgrades to their growth prospects – the latter actually turning from an expected contraction to expansion. Yet, like most other Euro fundamentals, this is inert support. A true recovery to competitive levels is years away, and a slip back into crisis easy to suffer. Notably, we will watch Italy’s political situation.


Australian Dollar Rallies after RBA Skips ‘Scope’ Language for Further Cuts
The Australian dollar is soaring this week. Through early Wednesday trade, the currency is up between 1.2% (AUD/NZD) and 3.4 percent (AUD/JPY). Uniform performance against low yield funding and fellow "investment" currencies tells us that this is a strength inherent to the Australian dollar itself. The drive began in earnings Tuesday morning with the Reserve Bank of Australia’s monetary policy decision. The group wouldn’t actually change its policy, but the interpretation of their statement was enough to push overnight swaps to price in the first probability of a hike (approximately a 25 percent chance of a 25bp hike in 12 months) in over two years and send AUDUSD 65 points higher in the minutes after the event. The root of this performance was the absence of previous rhetoric that suggested there was further ‘scope’ for easing if warranted. It’s a modest change, but it alleviates pressure. None of that matters if risk trends collapse though.


Canadian Dollar: Will the Market Project Rate Hikes after BoC Decision?
The second of this week’s round of major central bank rate decisions is due in the upcoming session. The Bank of Canada has found itself essentially overlooked in favor of the tangible changes measured in Australia (easing off the dovish pressure), UK (implementation of forward guidance), and US (Taper consideration) amongst others. Though the BoC stood out the past few years for its resistance to further easing, its benchmark rate while fellow commodity-currency countries, Australian and New Zealand, were forced to capitulate. However, such idleness is no longer treated as bullish. Watch for anything that resembles a time frame for the first hike, the market expects 75 bps from RBNZ in 12 months.


Emerging Markets ETF Rebounds but Indian Rupee in Trouble Again
Emerging markets struggled for progress through the opening 48 hours this week, but traction was uneven. Where the Brazilian real continues to develop congestion around 2.4000 against the benchmark US currency, the Indian Rupee has reignited investors’ fears. Reflecting the group’s capital markets, the MSCI Emerging Market equity index rose another 0.6%t through Tuesday, extending a four-day advance. Yet, confidence at this extreme end of the financial market is fragile at best. Moves like the USD/INR’s 2.6% surge Tuesday, the second largest in over 15 years, can encourage a rush to the exits. The OECD’s remarks highlight what the fear for the region is: the prospect of the Fed easing back on its market support and thereby boosting the cost of investments made into these resource-intense areas.


Gold Ends Tumble as Syria, Central Bank Risks Come into View
With Tuesday’s 1.5% rally, gold brought to close a three-day tumble. However, neither bounce nor the tumble through holiday trading conditions offers up a clear trend. A strong bearing on this commodity market is difficult to derive given the backdrop of questionable and fluid fundamentals. On the other hand, there is enough interest (fear?) in the global financial markets to generate serious volatility for the precious metal. At the forefront of our concern for both activity level and trend is the escalation of an aggressive risk deleveraging. The more immediate spark, though, is Syria. Should the situation cause global financial markets to hemorrhage, expect gold’s "issues" to be minimized.

The standing issues gold will carry forward will act as a constant burden on the metal and work against a rebound above $1,550 , much less a reach than the $2,000 goal for long-standing bulls. The key to its troubles are the recent bouts of extreme volatility. The two-day 15 percent plunge in April in particular will be a lasting weigh that undermines any argument that it is a serious safe haven. Meanwhile, gold can gain more superficial traction through speculative repositioning. According to the COT report from last week, speculative futures positioning improved four a fourth straight week. Over that period in fact, short trades on the metal dropped by 55 %, a buoy but not the stuff of lasting trends.