Dollar Marks another Six-Week High, Conviction Questionable

• Dollar Marks another Six-Week High, Conviction Questionable
• Euro Takes ECB Warnings, Banks’ Crisis Scenario In Stride
• British Pound Tumbles after Cameron Announces ‘Massive’ Credit Easing
• Australian Dollar Follows Equities Lower as December Rate Cut Priced In
• Japanese Yen Sudden Tumble Not Likely Intervention Effort
• Canadian Dollar: What Kind of Market Impact to Expect from Retail Sales
• Gold Suffers Its Sixth Largest Daily Drop this Year…On a Day Equities Tumble

Dollar Marks another Six-Week High, Conviction Questionable

The Dow Jones FXCM Dollar Index managed a modest rally through the opening session of this trading week; and the fundamental waves around the global financial markets seemed to offer distinct support for the move. Yet, when we look closer, there is reason to remain cautious on jumping on the pure safe haven bid that the greenback offers. To set the initial bearings for our fundamental view, we should first refer to the underlying trend in investor sentiment. Our favored, benchmark risk indicator (the S&P 500) marked a clean and prominent drive below month-long support to trade back within the range that contained the index from August through the first half of October. Alone, this wouldn’t be enough to call a true risk aversion event; but we witnessed similar moves in stock benchmarks in Asia and Europe alongside speculative commodity losses to confirm the effort.

Where the doubt comes into play is the participation aspect of such a critical move. Considering the implications such a broad reversal carries, we would expect to see a surge in volume as the push lower turns into a cascade of risk unwinding. That, however, was not the case. Turnover continued its steady decline from the late-July / early-August deteriorating trend. Another interesting measure of both the risk and dollar interest was the performance of the majors. With the straightforward speculative asset classes under pressure, high yielding majors (like AUDUSD, NZDUSD and USDCAD) were all showing marked dollar gains. However, there was a particular hold out in this effort from the most fundamentally troubled liquid currency in the market: the euro. Again, a true, risk aversion move that that boost panic to the level necessary to spur liquidity demand for the dollar would no doubt hits this fragile currency as well.

Following the headlines, some may believe that there was perhaps an impact from the Super Committee’s failure to reach a deal to reach the minimum $1.2 trillion reductions in the deficit over the coming 10 years. However, as we were reminded by Standard & Poor’s, falling short of a deal here doesn’t specifically raise the risk of further rating cuts for the United States. Besides, negative implications here would likely carry over to risk trends just as surely as for the US – and could thereby actually boost the greenback. Instead, we should remember that we are heading into a period that typically sees a significant drop in speculative participation. Furthermore, we continue to see through currency swaps and short-term deposits with the Fed that foreign demand (specifically European banks) continue to scramble for safety and dollars.

Related:Discuss the Dollar in the DailyFX Forum, John’s Video:EURUSD and Volume Fail to Confirm S&P 500 and AUDUSD Collapse

Euro Takes ECB Warnings, Banks’ Crisis Scenario In Stride

There were few, favorable euro-related headlines Monday; but the currency managed to hold its own. Perhaps most concerning was the suggestion by key policy officials that the European financial crisis is clearly spreading to the ‘core’. According to ECB board member Stark, the sovereign debt crisis has gained in intensity and was moving toward Italy and possible France. EU Commissioner Rehn echoed the concern that there should be no illusion that dominos are falling towards the largest members of the Union. Why is this so concerning? When the people that are trying to manage the crisis – the natural cheerleaders for improvement – are voice doubt; it signals to the rest of the market that something is very wrong. This is particularly troublesome when banks are projecting doomsday scenarios in an effort to entice a bigger rescue. Also notable, the Bundesbank lowered Germany’s 2012 GDP forecast from 1.8 to a range of 0.5 – 1.0 percent; while ECB member Nowotny ruminated on the possibility of a December rate cut (a move that the market currently puts at 62 percent).

British Pound Tumbles after Cameron Announces ‘Massive’ Credit Easing

There are a few important similarities and differences between the sterling and dollar. Where the greenback is a near-permanent safe haven and is backed by aggressive stimulus; the pound is inextricably connected to the EU’s troubles and the government is dead-set on austerity. Or a form of it. While the deficit cutting under economic crunch is still the name of the game for the Prime Minister David Cameron, he has recognized the threat of recession. The policymaker announced a ‘massive’ credit easing program – a similar stimulus move that washed out the dollar.

Australian Dollar Follows Equities Lower as December Rate Cut Priced In

With global equity benchmarks putting in for meaningful, bearish breaks; it should come as no surprise that the FX market’s most liquid high-yield currencies were under similar pressure. The Australian dollar in particular will not fail to fall under risk aversion pressures with the market near certain of a quarter-point rate cut from the RBA come December. As conditions deteriorate, it further boosts this scenario.

Japanese Yen Sudden Tumble Not Likely Intervention Effort

There was a sharp tumble in the Japanese yen through the early Asian session Tuesday; and the first thing to pop into many currency traders’ minds was: intervention. Yet, this was not the sudden shift in price we would expect; and though we don’t expect manipulation to be effective, it died out far too quickly. More likely, this was a natural swell in quiet markets, perhaps following Azumi’s reflections on purchasing programs.

Canadian Dollar: What Kind of Market Impact to Expect from Retail Sales

When we come up to historically-influential market moving indicators like the upcoming Canadian retail sales report; it is important to determine whether they will generate significant price action to interrupt existing or possibly trigger potential trades. While this particular indicator taps into the growth that will help define its place in the investment spectrum; it is unlikely this will meaningfully alter its response to underlying risk.

Gold Suffers Its Sixth Largest Daily Drop this Year…On a Day Equities Tumble

There should be few preconceptions about what fundamental trends gold is following nowadays. With the sharp drop in the S&P 500, tradition would say the safe haven metal should rise; but we know there is a ‘liquidity’ pressure throwing this market out of skew. We should watch the strong moves with an eye to volume. Also like the S&P 500, gold showed a particularly quiet turnover through this past session.

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

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