A quiet trading session does not necessarily equate to a stationary US dollar. In fact, tame market conditions actually encourage a depreciation of the world’s reserve currency – as we witnessed during Friday's trading session. And, considering activity levels are expected to see limited excitement through the final 24 hours of the trading week, that slow decline may drag EUR/USD closer to 1.3000 and possibly even drive the Dow Jones FXCM Dollar Index below the closely watched 10,000-figure.
With the US capital markets offline Thursday for the Thanksgiving holiday, there was a clear break in the cycle of risk trends. Looking to measures of activity, we saw a considerable drawdown on volume figures in Europe and Asia while the FX Volatility Index held below the 7.5 percent mark - barely off the five-year low set earlier in the week.
If the risk of a sudden risk aversion move is exceptionally low (even when the fundamental backdrop looks as troubled as ever), there is little reason to stay with the dollar and suffer negative, real rates (adjusted for inflation) of return. In other words, those securing capital in the most liquid assets available could repatriate/unwind.
That being said, this period of calm is temporary. Volume will return next week, and the big ticket fundamental items that constantly hang over the market can easily spark volatility after the October-November deleveraging effort set investors on edge. In measuring threats to risk trends, it is important to prioritize immediate and definable threats to financial stability. The Fiscal Cliff was on pause as a catalyst this past week as the reports of "constructive" conversation between President and Congressional leaders last Friday left us with a sense of ambiguity, and the former’s tour of Asia prevented progress.
Both parties are expected to hold meetings on this critical cliffhanger next week, but no times or dates have been offered. Far more clear cut to the observant speculator is the return to the Greece crisis negotiations. Had liquidity been topped off this past week, the delay on a resolution to the country’s next tranche of aid this week would have no doubt fueled risk and the dollar.
Euro Advances Across the Board, EUR/USD Barely Misses 1.2900
The euro struggled for its gains over the opening half of the trading week, pushing higher despite the pained fundamental backdrop. The currency seemed to have less of a problem pushing higher this past session though – even if the fundamental on the day were hardly supportive of the move. If there is any currency that truly benefits from the absence of a large speculative contingent (that theoretically processes probabilities for fundamental trends, especially unfavorable scenarios), it is the euro.
That is a theory that was fleshed out in its performance through Thursday by rallying against all of its liquid counterparts. Specifically for EUR/USD, this performance translated into a notable move above considerable resistance at 1.2825 and lead the pair to climb just short of 1.2900.
Moving forward those watching the headlines will have both on and off-docket event risk to digest. However, just as the PMI figures (showing a 10th monthly contraction in growth) and EU Budget Summit (ending with considerable contention amongst members) failed to generate much movement either way, the upcoming highlights will likely also lack for influence. Nevertheless, keep an eye on the German IFO business sentiment report and day two of the Budget meet. For real activity, we must look forward to Monday when the Greece talks start again.
Japanese Yen Finally Puts in a Reversal…A Modest One
The run from the yen crosses was starting to grow extreme. USD/JPY, CAD/JPY and AUD/JPY were all on six-day advances. Though there were some comparable moves consistency-wise in October, they did not possess the level of momentum we had seen through this week. What makes it all the more remarkable was the fact that risk trends were tempered just as surely as speculative deleveraging due to the lack of speculative volume. In other words a pullback was inevitable. That correction came Thursday with a mild bounce for the yen. At this rate, a deeper drop is likely as the speculative element that has participated in this move will see an opportunity to take profit in non-trending markets.
Australian Dollar Awaits Next Yield Push, Outlook at 8 Month High
Though a lot of the permanently bullish Aussie dollar traders (those hungry for a decent, consistent yield) have taken to the IMF’s review of the currency as a possible reserve, this label will hardly change its medium-term bearings. There are two things that matter to the high-yield unit: risk trends and yield forecasts. Sentiment will be sidelined for the rest of the week unless there is an unforeseen shock, though they will likely return after the weekend. It is the rate outlook that acts as a stubborn buffer to AUD/USD. The 12-month forecast is at an 8-month high -50 bps outlook.
Canadian Dollar Suffers Retail Sales Hit, CPI Up Next
When more prominent fundamental considerations like sentiment trend are on ice, normally overlooked catalysts like mundane economic releases can carry more market impact. That was the case for the Canadian retail sales this past session which came in well below expectations and led the loonie to a notable and consistent decline. We will see if CPI figures in the upcoming session can accomplish the same.
Swiss Franc: SNB Official Speaks of Risk in 1.2000-Floor
SNB member Zurbruegg took a different tack than what his monetary board companions usually steer. Instead of simply sticking to the dedication to the EURCHF’s 1.2000-floor, the central banker said that this was an extreme measure with "considerable risk." That doesn’t sound like an "at all costs" commitment should we find the exchange rate back at its floor. Are they bending with FX reserves at 70 percent of GDP?
With the US capital markets offline Thursday for the Thanksgiving holiday, there was a clear break in the cycle of risk trends. Looking to measures of activity, we saw a considerable drawdown on volume figures in Europe and Asia while the FX Volatility Index held below the 7.5 percent mark - barely off the five-year low set earlier in the week.
If the risk of a sudden risk aversion move is exceptionally low (even when the fundamental backdrop looks as troubled as ever), there is little reason to stay with the dollar and suffer negative, real rates (adjusted for inflation) of return. In other words, those securing capital in the most liquid assets available could repatriate/unwind.
That being said, this period of calm is temporary. Volume will return next week, and the big ticket fundamental items that constantly hang over the market can easily spark volatility after the October-November deleveraging effort set investors on edge. In measuring threats to risk trends, it is important to prioritize immediate and definable threats to financial stability. The Fiscal Cliff was on pause as a catalyst this past week as the reports of "constructive" conversation between President and Congressional leaders last Friday left us with a sense of ambiguity, and the former’s tour of Asia prevented progress.
Both parties are expected to hold meetings on this critical cliffhanger next week, but no times or dates have been offered. Far more clear cut to the observant speculator is the return to the Greece crisis negotiations. Had liquidity been topped off this past week, the delay on a resolution to the country’s next tranche of aid this week would have no doubt fueled risk and the dollar.
Euro Advances Across the Board, EUR/USD Barely Misses 1.2900
The euro struggled for its gains over the opening half of the trading week, pushing higher despite the pained fundamental backdrop. The currency seemed to have less of a problem pushing higher this past session though – even if the fundamental on the day were hardly supportive of the move. If there is any currency that truly benefits from the absence of a large speculative contingent (that theoretically processes probabilities for fundamental trends, especially unfavorable scenarios), it is the euro.
That is a theory that was fleshed out in its performance through Thursday by rallying against all of its liquid counterparts. Specifically for EUR/USD, this performance translated into a notable move above considerable resistance at 1.2825 and lead the pair to climb just short of 1.2900.
Moving forward those watching the headlines will have both on and off-docket event risk to digest. However, just as the PMI figures (showing a 10th monthly contraction in growth) and EU Budget Summit (ending with considerable contention amongst members) failed to generate much movement either way, the upcoming highlights will likely also lack for influence. Nevertheless, keep an eye on the German IFO business sentiment report and day two of the Budget meet. For real activity, we must look forward to Monday when the Greece talks start again.
Japanese Yen Finally Puts in a Reversal…A Modest One
The run from the yen crosses was starting to grow extreme. USD/JPY, CAD/JPY and AUD/JPY were all on six-day advances. Though there were some comparable moves consistency-wise in October, they did not possess the level of momentum we had seen through this week. What makes it all the more remarkable was the fact that risk trends were tempered just as surely as speculative deleveraging due to the lack of speculative volume. In other words a pullback was inevitable. That correction came Thursday with a mild bounce for the yen. At this rate, a deeper drop is likely as the speculative element that has participated in this move will see an opportunity to take profit in non-trending markets.
Australian Dollar Awaits Next Yield Push, Outlook at 8 Month High
Though a lot of the permanently bullish Aussie dollar traders (those hungry for a decent, consistent yield) have taken to the IMF’s review of the currency as a possible reserve, this label will hardly change its medium-term bearings. There are two things that matter to the high-yield unit: risk trends and yield forecasts. Sentiment will be sidelined for the rest of the week unless there is an unforeseen shock, though they will likely return after the weekend. It is the rate outlook that acts as a stubborn buffer to AUD/USD. The 12-month forecast is at an 8-month high -50 bps outlook.
Canadian Dollar Suffers Retail Sales Hit, CPI Up Next
When more prominent fundamental considerations like sentiment trend are on ice, normally overlooked catalysts like mundane economic releases can carry more market impact. That was the case for the Canadian retail sales this past session which came in well below expectations and led the loonie to a notable and consistent decline. We will see if CPI figures in the upcoming session can accomplish the same.
Swiss Franc: SNB Official Speaks of Risk in 1.2000-Floor
SNB member Zurbruegg took a different tack than what his monetary board companions usually steer. Instead of simply sticking to the dedication to the EURCHF’s 1.2000-floor, the central banker said that this was an extreme measure with "considerable risk." That doesn’t sound like an "at all costs" commitment should we find the exchange rate back at its floor. Are they bending with FX reserves at 70 percent of GDP?