Dollar Retreats From 5-Month High, Alcoa Earnings To Stir Risk

The US dollar needs a definable, drive in sentiment to jumpstart its own trend. Otherwise, the safe haven currency will continue to slowly retrace its post-Fiscal Cliff resolution rally. That was the fundamental pace of the currency’s performance through Monday. The Dow Jones FXCM Dollar Index extended the late-day pressure from Friday into a significantly decline to further retreat from the five-month highs the currency set last week.

From the majors, this change in direction has helped define a distinct floor underneath EUR/USD at 1.3000 and GBPUSD at 1.6000. However, it is important for fundamental traders to recognize that these are less gains made on "risk" trends and more a drop in the dollar itself. The carry-sensitive AUD/USD is strong evidence of this differentiation as it barely moved – capped by 1.0500.

Recognizing the forces behind the dollar’s opening move is important for a few reasons. First of all, a move that stems from a dollar fundamental drive alone will dry up quickly without fresh pressure to keep it moving. Furthermore, there is likely to be a ‘normalizing’ phase where benchmarks at opposite ends of the speculative spectrum return to their respective corners – a possible trading opportunity in itself. Last week, the US government managed to cobble together enough of an agreement (after the technical deadline) to avoid the brunt of a Fiscal Cliff and the likely resultant recession.

The relief to growth and investment trends is what capital markets seized on, but the dollar would also find a relief rally via the receding risk of a credit downgrade by one of the major Rating Agencies. The initial relief rally was impressive enough to sync a reserve currency to risk trends on an aggressive rally. Yet, that "relief" move would be quickly spent. As we return to the primary fundamental themes for direction, it is interesting to note that the S&P 500 (a benchmark for risk trends) held its tight 10 handle range below 1465 while the greenback further retraced its gains.

There is still room for further correction to last week’s exuberance (both for the dollar and equities), but consolidation is more likely to set in until the investing masses are once again spurred to invest or withdrawal capital. We have a chance to perhaps spark risk trends once again (for better or worse) with Today’s upcoming event risk. Rather than looking at the economic docket, we should keep our eyes trained on the earnings calendar.

Blue chip Alcoa will start off the 4Q US corporate earnings season after the US close when its reports its numbers. While this firm’s health alone is unlikely to generate a market-wide risk trend - we are more likely to see that pressure when Wells Fargo prints Friday; and Goldman, Bank of America, JPMorgan, Citi and other report next week - it will set the tone moving forward.

Japanese Yen: Finance Minister Aso Says Japan Will Buy European Bonds
The yen crosses have individually climbed over 1000 pips…and they have done so in only a matter of months. There are numerous warning bells sounding for technical traders that suggest the these crosses are due for a serious correction (the yen rebounds). Perhaps the Japanese government recognized the risk that their effort to drive their currency lower to spur growth was at risk, because they took action this morning.

New Finance Minister Taro Aso announced that the government would buy ESM (European Stability Mechanism) bonds using foreign currency reserves. This is the kind of big-gun effort that carried considerable potential a number of months ago. Yet, this morning, we find EUR/JPY unchanged from the session open. Policy officials are in a dangerous position whereby the market can decide to once again discount official’s efforts. If risk trends were to topple right now, very few things would be able to stem the yen crosses’ bleeding.

Euro Facing Confidence Indicators, ESM and Greek Bond Auctions
With the Greece crisis on ice and the full weight of Spain’s debt issues not yet realized, the euro is simply playing to the influence of traditional risk trends. That said, it is worth noting that the unwinding of euro shorts on belief of an imploding financial system seems to have dried up as well. On deck, we have eurozone jobs and confidence figures. More interesting though will be short-term bond auctions by Greece and the ESM. The latter is particularly timely given Japan’s recently announced intention to invest in the rescue fund’s debt.

Australian Dollar Shows Little Reaction to Trade Data
While normally hyper-sensitive to anything that can stir risk trends, the Australian dollar was little moved by the disappointing November trade report this morning. The deficit expanded more than expected to A$2.64 billion – though biggest shortfall since March of 2008. This is certainly a damper to growth for the country, but it is hardly a surprise given the global economic winds and high currency level. It needs a strong risk push.

Canadian Dollar Climbs on Factory Report, Not Enough to Break 0.9850
Another "investment" currency that was facing an ineffectual fundamental push was the Canadian dollar. Monday morning, the docket offered up the Ivey manufacturing activity (PMI) survey. The 52.8-read reflected growth in the sector and was a shift from the 16-month low in the November figure. However, the bump wasn’t enough to encourage the finely balanced USD/CAD to break below 0.9850.

Swiss Franc: SNB Reports Foreign Exchange Holdings Little Changed
Though the EUR/CHF has held off of the1.2000-floor for some time, we have yet to see a permanent shift where the floor will not be revisited again in the near future. The flight to safety for European investors and citizens is a looming threat, and the SNB recognizes it. The December Foreign Currency Reserves report, we saw the central bank refrained from unwinding its massive holdings for fear of driving the franc high.