Dollar Lacking the Oomph to Capitalize on 2-Year EURUSD Lows

• Dollar Lacking the Oomph to Capitalize on 2-Year EURUSD Lows
• Euro Slides Across the Board as Finance Ministers Fail to Deliver
• British Pound Stimulus Having an Impact on Sterling, Still Euro-Dependent
• Australian Dollar Tracks US Equities, Curbs Reaction to Chinese Trade Data
• Japanese Yen on Countdown to BoJ Rate Decision
• Canadian Dollar Fortifying Position Between Data, Yield Stability
• Gold Drops Against High Yield and Safe Havens Alike

Dollar Lacking the Oomph to Capitalize on 2-Year EURUSD Lows

You would think that with EURUSD closing at its lowest level since June 29, 2010 that the US dollar would surge across the board. Yet, one currency’s weakness or strength doesn’t automatically insinuate the opposite from its counterpart. And, sometimes the health of the euro doesn’t directly leverage the performance of its primary alternative. Sure enough, looking at the greenback’s performance across the board Tuesday, there was distinct outperformance (with the exception of USDJPY). However, the gains for the dollar were for the most part rather modest. The restraint is more than clear when we refer to the gauges for risk trends. As a preferred safe haven currency, the fourth consecutive daily decline from the S&P 500 (my preferred sentiment indicator bolstered by hope for stimulus as it is) gave the currency enough of a push. What was absent though was the momentum or fear that truly weighs growth-dependent capital markets and thereby leverages the extreme safety appeal of the liquidity provider.

The Dow Jones FXCM Dollar Indexconspicuously held below its near-four week range resistance at 10,200 Tuesday despite the progress made by equity indexes. The missing component for the currency is outright fear. Looking at the more highly tuned measures of fear, we find that the equities-based VIX index has seen a clear lack of progress after testing two months last week while the FX-version is attached to similar lows. In other words, despite the lack of potential returns and the growing risk to financial instability; the market is projecting the most steadfast conditions since before the financial crisis back in 2008. Without exaggeration – that is a clear underestimation of the risks ahead. Yet, fear is kept at bay due to expectations. After Alcoa’s 2Q earning’s showing, there may be some lingering hope that the JPMorgan figures on Friday and further reporting over the next week’s could beat the worst forecast for the S&P 500 companies since this upswing took hold. More potent for the holdout bulls, however, are the insistent expectations for QE3 from the Fed. Central Bank members Williams, Evans and Rosengren fed stimulus expectations this past session; but that is nothing new. The masses will look to the upcoming FOMC minutes for more guidance on support.

Euro Slides Across the Board as Finance Ministers Fail to Deliver

European policy officials can’t cast a spell over the market like they used to. It was less than two weeks ago that the EU Summit supposedly resulted in dramatic changes to the regional authority’s crisis fighting abilities. Doubt found a foothold almost immediately, but it took time to get back up to speed on the unwinding effort. Still at the center of debate for the Euro Zone’s rescue capabilities are the time frame and implementation details for Spain’s bailout (which supposedly avoids the follow up troubles Greece faced), the ESM’s ability to directly recapitalize banks and approval for the ESM to purchase government bonds.

After Euro-area finance ministers meetings this week, it is growing clearer that the prerequisite to direct bank recapitalization (a common banking sector overseer) will not be found before September – or in a last minute effort to avert crisis. For the critical step of approving the rescue fund to purchase government debt and easy pressure on country’s struggling to tap debt markets for funds, the German constitutional court is taking its time to deliberate and there is still the issue that there are high benchmarks for approval on individual efforts. Most immediately concerning though is the lack of progress on Spain. No details on the already agreed bailout were agreed to. The next kick down the road is for July 20.

British Pound Stimulus Having an Impact on Sterling, Still Euro-Dependent

The UK’s event docket was rather busy this past session, but that doesn’t mean the sterling was responding as would be expected. From the calendar, we learned that industrial production through May surged by the most since May 2010; but this outperformance was likely due to an additional working day due to a deferred holiday. Requiring fewer disclaimers, the NIESR GDP estimate for June reported another monthly contraction for the economy (0.2 percent). Putting it all into perspective though, officials and the market are watching the Euro crisis spread.

Australian Dollar Tracks US Equities, Curbs Reaction to Chinese Trade Data

There is a lot to keep track of for the Australian dollar. From its own docket, we had a pickup in both consumer and business confidence surveys this past 24 hours. Tracking the country’s dependency on China’s performance, the world’s second largest economy reported the biggest trade surplus in nearly three years – though this was more due to a drop in imports. Even the 12-month rate forecast is still trending out of the abyss. Yet, what truly matters is risk trends. If the masses are looking to unwind, that trumps data and the hope to stabilize the carry.

Japanese Yen on Countdown to BoJ Rate Decision

The Japanese yen has advanced against all its major counterparts since the beginning of the week. Yet, like the US dollar’s performance, progress is coming slowly. The general cut of risk trends is a concern once again here. With the yen, though, there is something else we need to keep in mind: the BoJ rate decision. Due Thursday morning, this policy decision could very well deliver an effort to further ease policy (more asset purchase, a cut in deposit rates, etc) to follow up on the effort by global central banks these past few weeks.

Canadian Dollar Fortifying Position Between Data, Yield Stability

The Canadian data run continues through the upcoming session. At the start of the week, the improved BoC lending measure and in-line business sales outlook survey set a balanced tone. Housing starts for June followed up by beating estimates this past session. Up next, we have trade figures. The more data that speaks to Canadian financial and economic stability – the greater the buffer to risk aversion swells.

Gold Drops Against High Yield and Safe Havens Alike

When we usually talk about gold’s performance, it is in dollar terms. Through Tuesday, another drop for the precious metal would bring us back towards that critical 1525-level. However, an interesting note on an otherwise ‘risk off’ day, the metal dropped against both the euro and Australian dollar (arguably, two of the most at-risk currencies out there) Tuesday. In fact, in Aussie dollar turns, gold closed a January 2 low.

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

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