Dollar Stumbles as S&P 500 Notches 3 Year High, Euro Awaits Stimulus

• Dollar Stumbles as S&P 500 Notches 3 Year High, Euro Awaits Stimulus
• Euro Absorbs IMF Refusal to Up Bailout Contribution, Greek Selective Default
• Japanese Yen Suffers its Biggest Hit in a Month – Trend Changer?
• British Pound Traders Speculate on Further BoE QE and UK Bank LTRO Participation
• Australian Dollar Ignores Gillard’s Win to Retain the Reins on the Country
• Swiss Franc: Will SNB’s Jordan Update Monetary Policy at His Upcoming Speech?
• Gold Tests 1,760 Floor as European Stimulus, Questions of Risk Trends in Focus

Dollar Stumbles as S&P 500 Notches 3 Year High, Euro Awaits Stimulus

While we haven’t broken to fresh two-week lows just yet, the US dollar is struggling to keep its head above water; and risk trends are applying pressure on the safe haven. The S&P 500 put in for another bullish performance Monday (albeit one that forged little progress on a close-over-close basis), which ushered the benchmark for risk appetite to a three-and-a-half year high close. The drive behind risk taking is tame, and therefore so too is dollar selling. Nevertheless, it is too consistent to ignore. And, with the trend in place, all that is needed is another catalyst to shake hesitance and generate momentum. What would clear the air this week? The ECB’s second long-term refinancing operation (LTRO).

Euro Absorbs IMF Refusal to Up Bailout Contribution, Greek Selective Default

The euro was dealt two discouraging updates Monday, and yet it managed to hold back the selling tide. Most influential for the troubled currency was the news over the weekend that the IMF was refusing to boost its contribution to the Greek bailout effort to match the European Union’s recent second bailout package. This wasn’t exactly a surprise, but it was said by a few Euro-area players that a matching move by the global fund would be key to the process (they will surely back off of any such claims now). Further trouble for the Greek problem was Standard & Poor’s downgrade of the country to Selective Default (SD). Despite what it sounds like, this is not actually the kind of default that would call an abrupt end to the rescue effort. The bond swap can boost the rating - though the S&P says only to CCC. And, that is when we start to discuss majority private sector investment (PSI) participation and forced restructuring through collective action clauses (CAC). Regardless of what temporary stays are put into place, uncertainty seems the order of the day. So why is the euro climbing? That is the stimulus (LTRO) effect.

Japanese Yen Suffers its Biggest Hit in a Month – Trend Changer?

Having rallied 10 of the previous 14 trading days and covering 7.4 percent over that time frame, the USDJPY’s correction Monday didn’t come as much of a shock. A correction after such a remarkable run is only natural. What really matters is what happens when the pullback runs its course. At that point, the market will need to decide whether it was simply an opportunity to take profit - and thereby temporary - or a genuine change in trend. A quick analysis says the trend of daily lows is still pushing higher and the benchmarks for risk appetite (S&P 500) are hovering just off their highs. If we wanted to, we could dig up a wealth of ‘reasoning’ to justify a quick return to yen dumping; but actual selling depends on concern that anti-carry or safe haven holdings need to be reversed. As long as volatility is high for the yen, this balance of risk will be tilted.

British Pound Traders Speculate on Further BoE QE and UK Bank LTRO Participation

We often talk about the fundamental and financial connections between the Euro-area and the UK. It is a general relationship that can be followed without much reference, but we should not a few particular links in this vein that will help prepare us for possibly large moves a little later down the line. The more immediate threat is in the upcoming ECB refinancing operation. While we it may seem that the European Central Bank would only open up the flood gate for Euro Zone financial firms, British banks are able to tap the fund for euros as well. In the first go around, there was supposedly little demand from UK players; but there is expectations of a larger take this go around. And not to distract ourselves with just the immediate future, we were given guidance by BoE member Fisher that the next decision on bond purchases would likely be made in May. The decision to hold at £325 billion or increase will very likely hinge on the Euro Zone’s spill over troubles by then.

Australian Dollar Ignores Gillard’s Win to Retain the Reins on the Country

Through the opening trading day of the week, the Australian dollar advanced against all its liquid counterparts – that is except for the Japanese yen. The slide from AUDJPY is particularly unusual given the general risk-positive consensus that the markets followed Monday. Nevertheless, risk appetite trends climbed through the London and New York trading sessions, and the high-yield currency benefited for it. Looking beyond the simple correlation between currency and risk trend, however, it is further interesting to note that the Aussie dollar would also post notable gains against fellow carry currencies in the kiwi and loonie. Offer an edge is the greater yield as well as a 12 month rate forecast that is at a seven month high (recovering to an outlook for a 50bp cut). Where does Gillard’s win come in? For FX traders, it is last-page news.

Swiss Franc: Will SNB’s Jordan Update Monetary Policy at His Upcoming Speech?

If you were to plot an intraday chart of USDCHF and overlaid it with USDEUR (EURUSD inversed) price action, you’d see an incredible correlation between the two. The same would be true between AUDCHF and AUDEUR along with nearly any combination of Euro and Franc-based pairs that switch out for a common third component. This shouldn’t exactly surprise us given EURCHF’s anchor to 1.20, but it still helps us to reset our expectations when analyzing any Swissie pair. When there is nothing actively driving the traditional safe-haven currency, it simply follows its more liquid counterpart. Though while we keep one eye on stimulus speculation surrounding the upcoming Euro-area banking system injection, we should also take in what acting SNB President Jordan says in his upcoming speech on the economy. Any stray into monetary policy suggestions (buying euros before 1.20, introducing capital controls, etc) and the franc could start moving on its own.

Gold Tests 1,760 Floor as European Stimulus, Questions of Risk Trends in Focus

Bullish ambitions for gold continue to moderate despite the renewed concerns for a clean Greek solution and clear pressure on the US dollar. That said, bulls don’t seem to be giving back much ground as the previous range high for December and early February at 1,760 held the line. News over the weekend that the IMF wouldn’t boost their contribution to the Greek bailout is clearly a destabilizing threat for an already fragile situation (which subsequently represents a clear boon for the metal’s safe haven appeal). Yet, the medium-term sustainability of the Euro Zone’s most rooted financial problem didn’t seem to spark much of a flight to safety. Such stubborn buoyancy from the euro comes on account of expectations of the mid-week LTRO. That said, in injection of stimulus diminishes the general appeal of government backed assets (currency, government bonds) and thereby leads right back to gold. Therefore, we may just be biding our time until the next bullish catalyst.

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

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