Dollar: Fed Stimulus Drives EURUSD to 1.3000 - Trend or Reverse?

• Dollar: Fed Stimulus Drives EURUSD to 1.3000 - Trend or Reverse?
• Euro Traders Can’t Ignore Fundamental Problems for Long
• Australian Dollar within Reach of 1.6000
• Japanese Yen: Are Azumi’s Warnings of Action Hollow or Real?
• Swiss Franc Moves Further from SNB’s EURCHF 1.2000 Floor – For How Long?
• New Zealand Dollar Posts Biggest Rally on the Day
• Gold Signals Trend as Metal Passes 1750 after Fed Announcement

Dollar: Fed Stimulus Drives EURUSD to 1.3000 - Trend or Reverse?

The highly-anticipated FOMC (Federal Open Market Committee) decision generated a hefty level of volatility and put the market on pace for a risk (bullish) and dollar (bearish) trend. The bearings may seem clear and consistent, but that 1.3000 break for EURUSD may not be the clear trend signal bulls might expect. There is little doubt as to the immediate influence of the US central bank’s policy decision this past session. With the Dow Jones FXCM Dollar Index diving to a fresh six-month low below 9800 and the S&P 500 comfortable advancing beyond its four-and-a-half year highs above 1450, the combination of dollar selling and risk appetite paints a consistent story. With these benchmarks and other risk-sensitive assets offering a distinct correlation in the collective progress, we find one of the most reliable measures of fundamental trend.

When completely unrelated markets are running under the same banner (rising investor sentiment), there is a dominant theme at the helm of the financial ship. That is perhaps one of the most meaningful and consistent indications of trend development that is available to us. The level of correlation across the markets has certainly tightened, but the fundamental headwind this ‘risk on’ drive is heading into is as onerous as ever. Furthermore, we are still lacking the conviction in follow through that we find in hearty participation. We aren’t at the level of open interest that we suffered through August’s Summer Doldrums, but the multi-year trend of capital withdrawal is still in place. And, there is little hope of sustaining a trend if there isn’t a market to feed bids as prices continue to move higher. To ensure the recent, impressive breakouts for EURUSD and equities have staying power, we need a fundamental adaptor that reconciles near-record low returns with very real fundamental risks.

The Fed (and other central banks) fills the gap between absolute risk-return potential and actual speculative positioning. The group’s most recent offering attempts to supplement the imbalance. For traders, the short-term impact of the rate announcement was the first concern. And on that front, the central bank disappointed. Given the considerable build up in expectations ahead of the event, traders would have preferred a concise and front-loaded QE program like the previous two, $600 billion efforts. Instead, the vow to purchase $45 billion in MBS a month ($85 billion if we take into consideration the Operation Twist adjustments through the end of the year) is vague for the short-term trader looking to take advantage of a heavy-handed investor. Of course, a dynamic policy effort that targets employment can have the better long-term effect on growth. But, hat brings us back to the question of whether stimulus is the answer to the world’s ills. Skepticism has grown, and a risk trends will struggle.

Euro Traders Can’t Ignore Fundamental Problems for Long

It’s easy to overlook a blatant rerun when there is something flashy to distract us. That was the case with the euro this past session (and generally the past few weeks). Preoccupied by the show of the Fed’s event and running on the endorphin rush of a fresh round of stimulus (everything looks better when a safety net is rolled out), the dollar-weakened EURUSD captured the market’s attention with its drive above 1.3000. And yet, the currency was showing a more restrained performance in other crosses as the newswires fed remarkably discouraging updates for the region. This past session, we learned from Greece’s IMF representative that the country would require more aid – a claim the country’s officials denied, but investors don’t have a hard time believing heading into the EU Summit. Another story to watch is the assurance by Spain and Italy that they don’t need to tap the ECB’s new OMT program. Buying time and reacting to a revived crisis...we’ve seen this episode…

Australian Dollar within Reach of 1.6000

AUDUSD is still mulling its convictions. The Aussie dollar has rallied for the third consecutive day (five of the past six sessions) after the Fed’s decision to further remove risk from carry traders’ plates. Yet, the push higher for the currency didn’t have the same intensity of the highly-publicized Dow Jones Industrial Average move through 13,500. Stability can be a sign of consistency; but against the backdrop of a doubtful future for risk taking, the measured pace before the 1.6000 level threatens to restrain the pair. The 12-month RBA rate outlook has improved with sentiment (there is a fundamental correlation there), but any whiff of reversal from capital markets and this currency will succumb quickly.

Japanese Yen: Are Azumi’s Warnings of Action Hollow or Real?

Thursday morning, Japanese Finance Minister Azumi repeated that he would not tolerate speculative control of the yen-exchange rate. This morning, Ministry official Nakao labeled the USDJPY price action that followed the Fed decision as ‘speculative’ and stated that he briefed the Azumi on the matter. The markets brush off warnings from Japanese officials nowadays. However, we should be careful. The Fed, ECB and BoE have all introduced flexible stimulus policies these past months and the Bank of Japan has a policy decision next week.

Swiss Franc Moves Further from SNB’s EURCHF 1.2000 Floor – For How Long?

If you wait long enough, good things may happen. At least they did for the SNB. At the Swiss central bank meeting Thursday morning, the policy group maintained its policy stance (vowing unlimited euro purchases at 1.2000 on the EURCHF) as the markets have lifted some of the pressure off their shoulders. We haven’t seen a material advance like this from this pair since November. Now if only the Euro crisis were truly passed…

New Zealand Dollar Posts Biggest Rally on the Day

There was considerable excitement surrounding the market activity through this past session, but key levels belied relatively restrained initial follow through. For the kiwi, however, having gotten the initial breakout above 0.8150 out of the way Wednesday; momentum was more readily available. The carry currency enjoyed the best performance of the majors (by a wide margin). Though, traders know leverage works both ways.

Gold Signals Trend as Metal Passes 1750 after Fed Announcement

Whether the stimulus effort by the Fed is enough to sustain risk appetite trends or not is of little consequence to gold. Central bank balance sheet building promotes inflation and undermines the natural value of currencies. That is the lifeblood of an alternative store of wealth like gold. The metal posted one of the most impressive rallies above 1750 on the day. The only thing that can stop it is a material recovery for the dollar.

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

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