Forex: Dollar Posts Third Four-Day Rally Since Bull Wave Began

Though its recent gains have been particularly reserved, the Dow Jones FXCM Dollar (ticker = USDollar) managed to fourth consecutive daily advance through Monday’s close. Since the general bull phase began for the benchmark currency, we have seen only two other instances of a climb of this consistency despite the positive bearing. For comparison’s sake, the benchmark hasn’t seen a five-day rally since early May of last year. It will be difficult for the currency to extend its impressive move, however, with the weight of heavy event risk due Wednesday. Though the 4Q GDP figure and Federal Open Market Committee’s (FOMC) rate decision the following day could theoretically offer the currency further support; the risk of further stimulus and stronger growth trends – both detrimental to a safe haven like the dollar – will keep many sidelined.

Looking at the dollar’s performance across its major pairs, we can establish a better picture of the currency’s underlying strength. Aside from standout performances on the greenback’s party against the New Zealand dollar (0.4 percent) and British pound (0.7 percent); the benchmark was virtually unchanged on the day. After establishing through a market-wide comparison that the sterling and kiwi were themselves big movers on the day (more on that below), we can better identify the dollar’s true performance. With risk trends sidelined by a shortfall in conviction and given the gravity of top event risk scheduled for the near future, the market is in a holding pattern unless an unexpected, systemic shock shows.

Euro Finding Little Progress Post-1.3400 Break for EURUSD
Amongst the major’s more reserved pairings was the EURUSD. A tepid 0.06 percent change on the day stands as a stark contrast to the progress that the world’s most liquid currency demonstrated through the final trading session of the past week. Typically, we would expect a remarkable range breakout – like the 1.3400 drive this past Friday – to generate some measure of follow through. The fact that there was no momentum to be found on the other side of the technical boundary speaks to the passing influence of the catalyst that managed to leverage the break itself. The ECB’s report that 278 Euro-area banks would repay €137.2 billion of the first Long-Term Refinancing Operation (LTRO) ahead of schedule carried a bullish connotation. The figure was larger than expected, the reduction was a sign of strengthened financial markets and it would stand as a reduction of the central bank’s balance sheet (a serious contrast from the competitive stimulus efforts of others).

And yet, reduced liquidity needs through this particular vehicle are consistent with the drop in current market lending rates for European financial institutions. Furthermore, shirking support may prove more of a financial detriment moving forward than an booster to investor confidence – as mentioned by both ratings agency Moody’s and the EU Commissioner Olli Rehn. Through the past session, the headlines took more of a skeptical slant on the Euro’s future. Rehn remarked that the Troika could ease the goals set out for Spain should the economic recovery slow – something that looks more than probable and will be substantiated Wednesday with the country’s 3Q GDP report. Another simmering issue that can’t help but catch bulls’ attention is the continued standoff on Cyprus. A spokesman for the German Finance Minister repeated that stimulus for the troubled country would only come if the country proved systemically important to the Euro-area’s stability. It may very well.

British Pound Tumbles as Incoming BoE Governor Supports Stimulus
The sterling provided the biggest move on the day Monday with a market-wide drop. The currency suffered a drop of between 0.3 percent versus another weak currency in the New Zealand dollar and 0.7 percent against the Japanese yen. The generally quiet trading conditions helped segregate the weakness of the pound on the day. From the economic docket, there was a round of housing data (Hometrack’s survey for January); and there was certainly some of the negative sentiment from last week’s 4Q GDP contraction spilling over. However, the selling pressure this past session was far more kinetic than these factors. An open-ended concern for FX traders is what future Bank of England (BoE) Governor Mark Carney (coming over from the Bank of Canada in July) will bring to the monetary policy table in the UK. He further concerned bulls and hawks when he stated at Davos that central banks should pursue easing policies until they achieve ‘escape velocity’ from recessions.

Japanese Yen Posts Universal but Restrained Gains Monday
It has been the case over the past few months that a calm market backdrop (where risk trends are not tumultuous or otherwise trend bound) will find the Japanese yen crosses advancing. That is because, in the absence of speculative positioning, the Japanese Government’s and Central Bank’s efforts to devalue the currency will show through. Yet, that wasn’t the case this past session. On the newswires, the country’s Prime Minister projected tax returns that would outpace bond issuance. Also, the 2013 growth forecast was upgraded to 2.5 percent from 1.7 percent.

New Zealand Dollar Posts Abrupt Rebound Punctuated by Trade Data
The New Zealand dollar opened the week under significant pressure. Selling on the currency was consistent across high yield and safe haven alike, pointing to something more specific than a general distaste for yield differentials. A rebound started on this decline later in the New York session that was further amplified by a surprise trade surplus for December; but true trend awaits a bearing in risk appetite.

Australian Dollar: Is the High Yield, ‘Reserve’ Currency Losing Interest?
Risk appetite trends in stimulus-supported markets (like equities) is outright bullish while the same sentiment in the more market-defined areas (like the Risk-Reward Index) are steady. Yet, we have found the Australian dollar maintain its easing cycle. Interest rate expectations are softening, but not materially. This weakness indicates something else – possibly the outflow of ‘reserve’ capital back to areas like the Eurozone.