Dollar Tumbles And EUR/USD Closes 9-Month High

Against the backdrop of a five-year high for the S&P 500 and a remarkable climb for EUR/USD, it wasn’t difficult to interpret the pain the US dollar was in Thursday. For the Dow Jones FXCM Dollar Index, the 57-point or 0.57 percent tumble was the steepest the benchmark has suffered since September 11 – notably the end of a three-month bear wave.

While the Index was suffering a significant hit, it was the individual pairs that truly stood out. EUR/USD’s 208-pip (1.6 percent) rally was the biggest since June 29, GBP/USD rallied 145 pips (a five-month record) and AUD/USD rose to close at its highest level since March. There are all impressive moves, but we have to ask whether this was the beginning of a lasting trend or a one-off swell spurred on by the right mix of event risk.

The difference between a lasting trend and a quick reversal for the majors (plunge or recovery for the dollar) is the source of Thursday’s move. There is tempting evidence in the performance across the market this past session that what was driving the swell in volatility was genuine risk appetite. If indeed the impetus for the move was a strong shift in the appetite riskier/higher-yielding assets and currencies, this may be just the first step in a lasting trend. Given the advance for US equity indexes, EUR/USD and the yen crosses; it would seem that there was a common denominator to the drive that can unify these very different markets. However, there are a few serious concerns that temper my optimism.

Correlations across these different markets are one of the best measures for underlying investor sentiment we have, but we can have a "false positive" with the correct mix of individual events. For EUR/USD, the strong rally was clearly sourced through a mixture of a better outcome for the ECB decision and strong showing for Spain (details on both below).

Looking to the yen crosses, discussion of BoJ stimulus was made tangible by the announcement that a large stimulus program was approved (more on that below). And, from the S&P 500, though it managed a technical close at five-year highs, there was little momentum and the daily performance was tepid.

Noting these concerns is not to mean that there can’t be an element of risk trends develop or that the markets won’t continue without the affirmation. With another round of the proper event risk, we can see the dollar suffer – though that is difficult to manage. Heading into the final trading day of the week, top event risk is the pre-New York open Wells Fargo 4Q earnings report. The US corporate sector’s financial health is a big ticket item that can truly alter risk trends’ bearing. Otherwise, we wait until next week and updates like China’s 4Q GDP release.

Euro Surges Higher after ECB Hold, Spain Bond Auction
The EUR/USD pairing wasn’t the only place that the euro was showing remarkable strength. In fact, the currency managed rallies against safe havens and high yield (aussie and kiwi dollars) alike. This wasn’t a structural fundamental support like risk trends, rather it was an inherent catalyst that generated one of the most overwhelming advances for the single currency in months.

It is easy to assign the responsibility for this move to a single factor – the ECB rate decision – but that wouldn’t be grasping the full picture. For the central bank released its decision and Draghi spoke, we learned that Spain was considering dropping a seniority clause for its rescue program and a bond sale for the country (2, 5 and 13-year debt) had met strong demand. That eases pressure on one of the region’s greatest threats for revive crisis. Therefore, when the market was met with the otherwise mundane, "unanimous" vote for no cuts and a loose outlook for recovered growth – bulls took over.

Japanese Yen Crosses Revive Strongest Run Since 1989
We have seen the USD/JPY and yen crosses swing from modest retracement to aggressive trend revival. There was a clear build in pressure to drive the yen lower and the crosses higher that was sourced in news Thursday morning that officials were looking to set an extra budget to pay for fresh stimulus. That stimulus – a 10.3 trillion yen boost – was announced this morning. Prime Minister Abe has all but written off fiscal reform. Meanwhile, the USD/JPY is on pace to close its ninth consecutive bullish week – a record not seen since February 1989.

Australian Dollar Closes 10-Month High, 1.0600 Up to Risk Trends
Like the S&P 500, we have to look at AUD/USD with a level of doubt. Despite the drive behind EUR/USD, this more risk-sensitive pair managed only a modest advance – even if it did close just off of 1.0600 and thereby technically end at a March high. A technical break alone means little if there is no follow through to the move. Chinese trade strength was a first step, but solid carry interest doesn’t seem to be a primary presence in the pair’s current position. This will be a good pair to gauge risk trends.

British Pound Ignores BoE Rate Decision, Runs on ECB Aftershocks
As expected, the market would completely overlook the Bank of England’s (BoE) rate decision Thursday. With no change to the benchmark or asset purchases, the central bank would remain silent on their expectations and evaluations. Instead, pound traders were looking to the euro, which surged forward. If that is a reflection of financial or economic health, the UK stands to benefit.

Canadian Dollar Stumbles Against Most Counterparts
Another unusual standout – the lesser yield of the Canadian dollar would subordinate it to the aussie and kiwi currencies and ensure the native strength of the European currencies would overwhelm it. There was housing data released Friday, but it barely changed and would not distract from bigger moves. The trade figure for November coming up could have more influence if we aren’t risk focused again.