Dollar Wedged Between 1.3400 And 1.3325, Awaiting Catalyst

With risk trends struggling for consistency and Fed officials passing up the opportunity to offer a tangible shift in monetary policy, the dollar was a mixed bag Monday. The Dow Jones FXCM Dollar Index’s performance on the session was essentially a technical advance by the thinnest of margins. Turning away from the USD/CHF and USD/JPY (spurred on by counterparty fundamental catalysts), most dollar traders are keeping their gaze fixed on EUR/USD.

Aside from its authority as the Forex market’s most liquid pairing, this benchmark has shown the greatest degree of depreciation since last week and is arguably the dollar’s weakest point. In other words, if there is to be a recovery registered, it will be done so through this pair. However, if we want to break back below 1.3300, we may need to see the S&P 500 below 1,450.

Swiss Franc Posts Biggest Collapse in 14 Months, Is it Free?
While the Japanese yen and euro continue to stand out for their impressive performances, these two high-profile currencies would not put in for the most impressive performance for the day Monday. That title goes to the Swiss franc. Long ago relegated to the position of afterthought, this currency may once again deserve our attention. Since September 2011, the Swiss National Bank (SNB) has vowed to keep a floor of 1.2000 underneath EUR/CHF.

Since April of last year, the pair had essentially flat-lined at that level. That meant that however euro traded against its third party crosses, the franc essentially did the same. That anchor started to loosen up in September of this past year, but has finally shown serious signs of a permanent departure from the imposed boundary. In fact, through early morning trading, EUR/CHF has rallied almost 300 pips in the span of less than four trading days. Monday’s rally alone was the biggest since November 7, 2011. That is serious.

Japanese Yen Drops but Recovers After Officials Says Collapse May be an Issue
The Japanese yen was already leveling off Monday, but the it made a concerted move higher during Tuesday’s Asian session. There is certainly weight behind a necessary correction of an immensely oversold currency – but as economist John Maynard Keynes said, "the markets can remain irrational longer than you can remain solvent."

The yen’s tumble has been fully engaged and driven through most sensible arguments of being "oversold." What changed? There was a potential crack that formed in the government’s otherwise unwavering vow to stimulate the currency to the ground. Economy Minister Amari broke rank and remarked that an "excessively weak yen" has negative effects on Japanese. This is hardly a wholesale change in the policy line, but bulls are looking for a reason to take profit. A true retreat comes with risk aversion.

Euro Most Overextended Currency of the Majors
While the euro-area’s tail risk seemed to be receding, the shared currency didn’t seem to exhibit too much inherent strength through the opening session of the new trading week. Through the final 48 hours of the past trading week, the euro was spurred on by the ECB’s hold on policy (offsetting dovish expectations) as well as Spain’s financial improvements (strong debt sales and suggestions that the rescue program would drop seniority claims in the event of a default).

Over the previous session though, there was limited follow up on that strong wave. Germany’s Finance Minister remarked that the eurozone would be stable even if Greek reforms faltered – seen as pandering. In other headlines, Standard & Poor’s affirmed the top credit ratings of Netherlands, Luxembourg and Finland (raising the outlook of the latter two). Positive, but not bullish.

New Zealand Dollar Posts Standout Rally after Data Mix
The New Zealand dollar advanced against every one of its liquid counterparts Monday – a considerable feat given the performance of counterparts like the euro and the lack strength from equities (as a measure of risk appetite) through the same period. The kiwi’s performance began early in the trading session and continued through the lull in equity futures performance. Fundamentals kicked in for the investment currency shortly after the US close.

The REINZ housing inflation indicator noted a quick, 0.6 percent drop in prices through December and sales growth (year-over-year) cooled to an 8.2 percent clip – just off the slowest pace since April 2011. Yet, that negative influence was more than offset by the news that 4Q Business Confidence (from the NZIER) swelled to a 20 reading – a positive showing a majority projecting growth.

British Pound Awaits CPI for Update on Policy Bearing
With the exception of the unique plunge from the Swiss franc, the British pound leveraged a particularly weak opening to the new trading week. The docket was light for the sterling on the opening session. The only thing to raise interest was a proposal made by the Bank of England’s Financial Policy Committee to be able to adjust the amount of reserves banks hold against real estate assets, bonds and derivatives in order to strengthen the financial system. In effect, this is an austerity measure for the financial system to avoid a full crisis.

Yet, this is still a proposal. In the coming session, FX traders should watch the economic docket. The UK will release inflation (CPI and RPI) figures which will tell us how much room the BoE has to maneuver with monetary policy – or whether it has to make a move to avert a policy impasse.