Dollar Looking for a Rebound in Market Volatility, EU Data

• Dollar Looking for a Rebound in Market Volatility, EU Data
• Euro Puts out Immediate Financial Fires, Now GDP Figures Up
• Japanese Yen Leveraged Risk in Intervention Threat, Not 3Q GDP
• British Pound Tries to Capitalize on 8 Month Highs against Euro
• Australian Dollar Traders will Look for RBA Bearings in Minutes
• Gold Rallies Alongside the S&P 500 to End the Week

Dollar Looking for a Rebound in Market Volatility, EU Data

The dollar ended this past week on exceptionally weak footing. The greenback dropped uniformly against all of its liquid counterparts as the fear of financial instability and general risk aversion itself receded. Yet, as we habitually ask of the greenback ‘is there a real reason to be long?’, we should put this swell in sentiment to the same litmus test. Was there a profound reason to spark the kind of buy-and-hold confidence amongst the investing masses that jumpstarts and maintains a bull trend? There was nothing from the economic docket or financial headlines that would give rise to market-wide optimism. The risk of the global economy falling into recession continues to rise (according to the IMF), benchmark yields are easing and no meaningful hurdles have been cleared to stabilize the financial troubles that have developed in different corners of the world. Neither was there a marked deterioration in the fundamental appeal of the world’s safe havens – a shift that would indirectly benefit the riskier segment. Therefore, it is more likely that this is more a relief rally as fear abates rather than trend built upon genuine confidence.

The primary difference between a relief rally and fundamental trend is staying power. Relief by its very nature is quickly priced in – not the consistent shift in market sentiment needed to keep the markets in motion. The lack of follow through this would entail resembled the questionable conviction behind Friday’s advance. Though the S&P 500 enjoyed its biggest rally in two weeks, the move was founded on the lowest volume levels since May 27th (additionally a side effect of the absence of credit markets due to the Veteran’s day and Armistice holidays in the US and Europe respectively). Running the top headlines of the final 24 hours through that same screening, we come to the same fundamental conclusions. The November University of Michigan sentiment report may have advanced for a third consecutive month; but it does little to meaningfully revive growth expectations. The same holds true for the Euro-area improvements – a new leader for Greece and approved austerity for Italy prevents exacerbating the problem; but it doesn’t improve it.

Looking at the week ahead, there is plenty on the economic docket to suggest volatility (retail sales, CPI, industrial production, housing starts, Fed speeches); but these events hold little sway over the deeply engrained outlook for US growth and monetary policy. Instead, we will look to the S&P 500 and broader market correlations to offer us a gauge of risk trends – both direction and severity. In the meantime, we should follow those events that can spur volatility within the congestion that is expected to develop within these fundamental constraints.

Related: Discuss the Dollar in the DailyFX Forum, John’s Video: GBPUSD, USDJPY and EURUSD Top Trade Potential in High Volatility Week

Euro Puts out Immediate Financial Fires, Now GDP Figures Up

No one would consider the European financial crisis resolved at the end of this week; but the sense that an imminent collapse of the Euro Zone is upon us has certainly eased. The most pressing trouble for the region was the risk that Italy was in dire financial straits and would need to tap the EU/ECB/IMF for a bailout of its own. Given the trouble in funding the existing obligations and guiding the troubled nations already taping the program out of the dark has been nearly impossible; a rescue of this magnitude would be out of the question. Though the Senate has pushed through the budget (and it is likely to make be fully enacted this weekend), this hardly absolves the underlying problems as the ECB desperately tries to pull the nation’s benchmark 10-year yield below the 7 percent threshold. The same skepticism goes double for Greece. We were already expecting the October 28th pact to be put through to ensure the next tranche of aid was received before their December obligations came due. Therefore, accepting a new government doesn’t really alter the fact that it is financially impossible for the nation to recover from its debts.

Nevertheless, without these risks breathing down euro traders necks; there is room for the currency to bounce. That doesn’t guarantee a bullish follow through this coming week though. If sentiment falters, so too will the most fundamentally-troubled unit. To add another line of trouble for the euro, we also have third quarter GDP figures due from key European players. Spain reported a stalled economy on Friday; and it is likely Portugal will show no better on Monday. The German, French and Euro Zone figures on Tuesday are the critical reads…risk versus reward…

Japanese Yen Leveraged Risk in Intervention Threat, Not 3Q GDP

USDJPY holds perhaps the greatest trading potential to open the week. While there are the third quarter GDP numbers to account for (the consensus is for 1.5 percent growth over the quarter following a 0.5 percent contraction); the real threat to volatility is in the risk of potential intervention. While it is a lower probability scenario, the risk of volatility in response to such a move is exceptional. Considering this pair (object of the manipulation) has retraced nearly two-thirds of its October 31st rally; the risk of a follow up – perhaps a permanent one – is high.

British Pound Tries to Capitalize on 8 Month Highs against Euro

As we have come to expect, the Bank of England rate decisions are generally unremarkable – and this past week was no exception. However, we have recently seen the European Commission warn the UK economy can suffer negative growth in the coming quarters and stimulus is so far doing little to offset fiscal austerity. This is a good time for the central bank to offer guidance in its Quarterly Inflation Statement this week.

Australian Dollar Traders will Look for RBA Bearings in Minutes

Of course, where risk trends head; so will the Australian dollar move. Yet, we know through diminished rate expectations that the Aussie currency will be more sensitive to negative developments. This sensitivity can be tempered or amplified depending on how the RBA minutes fall Tuesday morning. Will they confirm the December rate cut that the market seems certainly is in store?

Gold Rallies Alongside the S&P 500 to End the Week

It was another inexplicable day for the gold trader that doesn’t refer to the metal’s true fundamental role in the market. How can a safe haven advance alongside a risk-benchmark like the S&P 500? The commodity is an alternative to government-backed financial assets that are desired when liquidity is as at risk (credit strains eased). What’s more, gold is often a direct reflection of the US dollar which tumbled Friday.

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--- Written by: John Kicklighter, Senior Currency Strategist for DailyFX.com

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