Dollar Rebounds After Greece Decision Delayed, EUR/USD Ranges

The dollar spent Tuesday slowly drifting higher as the sharp risk aversion move over the open 24 hours of trading this week consolidated. That slow drift found a considerable accelerant early this morning, however, as the market learned that European policy officials had once again deferred making a decisive call on how to proceed with Greece’s financial aid – the linchpin to one of the financial market’s greatest fundamental threats.

Without a solution on hand to a market-wide threat, the comfort of dollar liquidity looks considerably more appealing. From a risk assessment, we find S&P 500 futures have taken a quick turn lower having held the well-worn resistance at 1,390/88. On the FX side, EUR/USD collapsed 80 pips while the AUD/USD dropped 40 pips. For the safe haven dollar itself, the Dow Jones FXCM Dollar has extended its climb from Tuesday’s 10,000-mark test. A turn in risk is one thing. A sustained trend is something else completely though…

News that eurozone officials have prolonged the uncertainty surrounding their weakest link is a clear bearish weight on speculators shoulders. The longer this situation continues unsolved (or more appropriately, unprogressed), the less likely it is that global investors will be satiated by a lackluster solution. The underlying reality is that the long-term situation in Europe, Asia and the United States is murky and not being met with clear and lasting reform (instead, officials seem to be betting on a "general improvement" in market conditions or other external development like exports or stimulus).

Yet, traders are willing to overlook the lack of a long-term solution so long as they see the opportunity to speculate for short-term gain in the interim. With each temporary effort to buy time and subsequent return to critical structural issues, we find the market less willing to play along with the short-lived risk rally. That speaks to a fundamental shift where deleveraging and dollar advance grow more permanent.

A lack of confidence in genuine improvement for growth, yields and financial operation is a critical concern for traders heading forward. That said, such concerns may be muted the rest of this week. Active risk aversion – the necessary ingredient for dollar strength – requires an active catalyst. However, we have seen the euro-area crisis put on ice and the Fiscal Cliff has grown scarce amongst the financial headlines. Furthermore, the liquidity drain and disruption in risk transmission with the US Thanksgiving holiday is fast approaching.

Euro Rally Halted in its Tracks after Officials Fail to Advance Crisis Fight
In the lead up to what was arguably this week’s most prominent event risk – the EU Finance Ministers’ funding decision on Greece – euro activity collapsed. In fact, the average hourly range just before the announcement was an incredible 10 pips. Why was this event so influential? Greece has had to return to the funding well numerous times, but this particular iteration has seen greater reticence and a many more delays than what we have seen in the past. Yet another postponement was announced early this morning.

After more than 11 hours of debate over the next steps for the eurozone’s most troubled member, officials reneged on their vow to offer a definitive resolution. Officials offered hollow remarks about progress in discussions and idea sharing, but these comments offer little reassurance. The statement that was released has set the next meeting on November 26 as the firm date for a verdict on Greece’s aid needs.

Looking ahead, the situation is tense with some EU members troubled about offering more support and the IMF wavering on further participation with the debt-to-GDP forecasts for 2020 projected well above the level deemed "sustainable." One thing is certain: Monday’s risk trend bearing has been significantly altered. Rather than return to a clear sentiment bearing, we will have another wait-and-see Monday.

Australian Dollar: Reserve Currency Status vs Risk Sensitivities
The IMF’s announcement that it was considering adding the Australian (and Canadian) dollar to the official list of reserve currencies offers a substantive change in fundamental bearing for the currency. A high-yielding, safe haven would be the Holy Grail for FX traders. Yet, the Aussie dollar doesn’t fit that ideal. The fund’s label wouldn’t represent an official change for traders – rather it’s a reaction to central banks already buying. This "reserve" status is flimsy. With enough momentum, the carry currency would quickly fall back into line in with a risk aversion move.

Japanese Yen Can Drop Slow or Drop Fast Depending on Vote
Heading into the December 16 Parliamentary vote in Japan, growth and a high yen will be a centerpiece of both the LDP and DPJ’s campaign. As such, stimulus and proactive currency devaluation will be a shared objective. However, there is a different rate of attrition for the yen. Under Noda (DPJ), the BoJ’s independence looks more secure. With Abe (LDP), unlimited stimulus and foreign bond buying is on the table.

British Pound: Traders Await BoE Minutes to Gauge QE Appetite
Bank of England Governor Mervyn King is very concerned about the state of the English economy if his statements are to be believed. And yet, his efforts to bolster growth (and offset government austerity measures) have fallen well short of what his counterparts in the US, eurozone and Japan have pursued. Is the MPC ready to augment its efforts? We will have another update from the upcoming BoE minutes.

US Oil Tumbles on Expectations of Gaza Strip Cease Fire
US oil prices collapsed Tuesday on early news that a cease fire would be called in the active engagement in the Gaza Strip. Such a move would help curb supply fears in the oil-rich Middle East. However, that calm never seemed to fully materialize. Crude prices began to rebound from 85.50 as that realization dawned. However, more general risk trends are a major factor here as well. With Greece, risk aversion is a weight.