Dollar Steadies But Doesn’t Turn From 1.3100

The past 48 hours have offered fundamentals that bolster risk appetite, financial stability and the U.S. money supply. In sum, the dollar’s strength should be significantly eroded. However, through the close of this past session, the greenback actually rose against most of its counterparts. From the Dow Jones FXCM Dollar Index (ticker = USDollar), the benchmark put in for its first bullish close in four trading days. That is both a reflection on the reserve currency as well as the backdrop market conditions. We must certainly be dealing with remarkable conditions, however, if a fresh wave of Fed stimulus and the withdrawal of the world’s most frequented threat (a Greek collapse) can’t pummel this safe haven.

What is most remarkable is the lack of follow through following the announcement this past Wednesday that the Federal Reserve had introduced another leg to its stimulus regime -- a $45 billion-per-month Treasury purchase starting with the new year…or is it? When we look back to the market reactions immediately following new stimulus programs, the reaction has proven inconsistent and generally net bearish for risk. In the past two years, the S&P 500 has shown positive build up to the Operation Twist (1.1% in the week preceding), Operation Twist extension (3.3%) and QE3 (0.3%). Yet, the aftermath has offered a different perspective: after Operation Twist a 2.2% drop in a week; the Extension spurred a 2.8% tumble, though QE3 offered a 1.7% climb (it is worth noting that it jumped 1.6% the day after). What does all this tell us? Anticipation builds as investors see stimulus producing an eventual bid that they can move ahead of -- slowly raising the bar on what it means to ‘beat expectations’. When the event passes, speculators have already moved; leaving little more than profit taking.

Expectations set the scene for fundamentals, but there is also a heavy contribution through backdrop market conditions that helps stabilize the dollar. Heading into the end of the year, the natural withdrawal of speculators further exacerbates speculative participation at 15-year lows (measured through S&P 500 futures open interest). There is slight ‘risk on’ bias associated with a withdrawal of such positioning, but that isn’t as influential for the dollar as the curb that this exit has on trend development. Without market depth, these ‘positive’ outcomes can offer little more than a relief rally for capital markets and modest weight on the dollar. Will this same set of circumstances hold for the Fiscal Cliff as well? The worst-case scenario for this particular threat draws a little more fear from the masses. However, expectations of a deal can already be seen.

Euro Shows Little Strength After Greece Approved For Aid
Where was the optimism and dramatic relief rally from the euro following news that the European Union had deemed Greece’s bond buyback scheme successful and approved the long-withheld next round of rescue funds? Though the Euro found positive bearing against most counterparts, it was a sparse 0.02% higher against its blatant, safe haven alternative -- the dollar. There is no doubt an element of dwindling speculative participation in this reaction. However, there seems to be more considering the EURCHF would actually drop on the day (this is a pair that is often used to track capital outflow from the Euro zone as it seeks safe mooring). Perhaps FX traders are paying less head to the quick fix, relief rallies given that general conditions dissuade such short-term drives. If that is the case, we may soon return to Spain.

British Pound Avoids 1.6000 Despite Failing Fundamentals
The fundamental waves keep crashing on the British pound. And yet, the currency seems to be generally oblivious to the short-term implications. Following the mixed bag between future BoE Governor Carney’s dovish musings and strong employment showing early this week, we learned Friday that ratings agency Standard & Poor’s had lowered its outlook for the UK from ‘Stable’ to ‘Negative’ -- implying a one-in-three probability of a rate cut over the coming two years. The country’s AAA status is a serious rudder for the sterling. Without it, the pound looks more like euro.

Japanese Yen Hits 9-Month Low vs. Dollar, Four Years Against Kiwi
The yen’s pummeling continues. On the week, the funding currency is down between 3.0% (NZDJPY) and 1.5% (USDJPY). The magnitude of this plunge is perhaps not as dramatic as its collapse through mid-November, but it is certainly remarkable for the level we now find the currency at. Against the dollar, the yen is at a nine-month low. Versus the New Zealand dollar, the Japanese currency is diving four-year lows. These are extreme moves any way we cut it. That being said, broader market conditions are not supportive of these kinds of movements. Given the lack of commitment to risk trends and the impending election this weekend, reversal risk is high.

Swiss Franc Rallies After SNB Holds Monetary Course
There was little chance that the Swiss National Bank would change its monetary policy efforts, and they certainly didn’t stray from the consensus. The policy group kept its rate at zero and maintained its stern warning -- that they would uphold the 1.2000-floor with utmost dedication. Modest updates to growth forecasts and talk of diversifying ballooning reserves didn’t seem to interest the market. The central bank has decided not to leverage the relief seen on the exchange rate and Euro-area tail risk relief seems to have topped out in influence.

Australian Dollar Finds Last Second Save From Chinese Data
Though risk trends showed a bounce through the closing hours of the U.S. trading session, the Australian wouldn’t take heed. The currency was weighing toward the 1.0500 level and weighting for another slip from sentiment to forge a break. We may have very well sat there until it broke lower if it weren’t from the HSBC’s slightly better than expected read on Chinese manufacturing for December. Yet that data has played.