Dollar Rebound Stalls as Euro Strength Weighs in Absence of Risk

• Dollar Rebound Stalls as Euro Strength Weighs in Absence of Risk
• Euro: Was the Rebound on the ECB Hold or Bond Auctions?
• British Pound Bows to Euro as Keeps Policy Unchanged, Remains Mum
• Swiss Franc Inches Towards 1.20 with Euro, Testing SNB’s Resolve
• New Zealand Dollar Run on Rate Forecast Speculation May Evaporate
• Australian Dollar Tied to Risk Trends but Data Glut Ahead
• Gold Simply Can’t Muster the Volume to Give Conviction to Trend

Dollar Rebound Stalls as Euro Strength Weighs in Absence of Risk

Looking at both EURUSD and the Dow Jones FXCM Dollar Index for Thursday’s session, we would discern a slide from the greenback. However, we shouldn’t take this to mean a particularly significant change in the currency’s health. The world’s most liquid pair was leveraged by the combination of an ECB rate decision and improved European sovereign auction results. And, amongst the other components of the aggregate, the world’s reserve was little moved. This volatility is yet another side effect of small waves in underlying speculative interests. We can see the evidence of uncertainty and detachment in price action. The Dollar Index is working its way into tighter congestion just below its highs from the past 12 months while our favored benchmark for risk appetite (the S&P 500 equities index) ticks higher with no momentum or volume. Periods of quiet are anomalous, especially when the fundamental risk is so high. So we continue to take stock of eventual direction.

Looking at the bigger picture, the Euro Zone’s burgeoning financial crisis is still the greatest risk to global market stability – and is therefore the greatest potential catalyst for the liquidity provider. In turn, the reduced pressure on the sovereign bond auctions in the euro-region (more on that below) deflates the pressure behind a potential explosive breakout from recent congestion. A definitive catalyst is needed to align the masses consensus for an improved outlook for growth and financial conditions (hard to imagine given developments over the past months and years) or draw hope for further stimulus closer to the reality of limits for moral hazard. Looking beneath the surface of supposed confidence in a future of bailouts, it is interesting to note the US Treasury’s auction of a 30-year bond (the epitome of safe haven) drew an incredibly low 2.99 percent.

Euro: Was the Rebound on the ECB Hold or Bond Auctions?

We knew that a ‘no-change’ policy decision from the ECB wouldn’t be a non-event for the euro. Given the heavy tides of emotion behind European financial fears and bailout hopes, the shared currency is particularly sensitive to all the nuance of monetary policy change. However, it is debatable whether the euro’s bullish performance Thursday was indeed a reaction to a stay in the path of easing or whether it was more reasonably attributed to the bond auctions for the session. The answer is important for determining whether we should expect follow through or not. From the EURUSD’s price action, it could be construed that the central bank meet was most influential. The timing of the euro’s intraday rally matches ECB President’s Mario Draghi press conference well. While the group didn’t change the benchmark rate from its 1.00 percent level or notably alter its bailout programs, the commentary did curb the outlook for further dovish moves. Highlights from his remarks were that a credit crunch had been averted and that growth was showing signs of stabilizing (at a low level). That is strong support for a hold at least through the next meeting. Yet, not providing stimulus (which easing essentially is) could exacerbate the region’s financial troubles…

The other event of note today was the Spanish and Italian bond auctions. Spain sold nearly twice what it was expected to auction (10 billion euros) and Italy’s 12-month sale pulled a rate of 2.735 percent (a dramatic reduction from the near 5 percent rate in December). This is important because it speaks to easing market stress – which is otherwise pushing Europe deeper into its crisis. If this was merely a swell on a rate hold and Draghi’s cheerleader comments, follow through will need another catalyst or it will fail. Should this be a response to the bond auctions, we can carry it a little further. In the upcoming session, we have another Italian auction (136-day bills) to test the waters.

British Pound Bows to Euro as Keeps Policy Unchanged, Remains Mum

Unlike the ECB’s decision to its policy course, the Bank of England’s steady move forward for monetary policy offered little to speculate on – much less offer a surprise reaction. The Monetary Policy Committee’s (MPC) silence is in line with policy to not release an update unless something is changed. That leaves the door wide open to speculation. The primary concern now is what will happen next month. There was a small chance that the BoE increased its 275 billion pound bond program this go around, but the real potential rests with February. When the central bank pumped up its effort in October, they said it would take four months to work in. A countdown and economic warnings equal risk.

Swiss Franc Inches Towards 1.20 with Euro, Testing SNB’s Resolve

Would the Swiss National Bank (SNB) step in with unlimited purchases of euros if the EURCHF exchange rate indeed attempted to drop below 1.2000? That hypothetical hasn’t really been put to the test since the floor was first introduced back in September. Yet, the markets are becoming far more comfortable in testing the conviction of central banks and their stimulus / manipulation efforts. This pair initially held above 1.2100 on the latent fear from bears that the floor could be raised to 1.2500. Well, we haven’t seen a move nor even a real test of 1.2000…

New Zealand Dollar Run on Rate Forecast Speculation May Evaporate

Though there was no serious shift in underlying sentiment trends, the kiwi dollar suffered a blow that seemed to miss the mark on its Aussie counterpart. This slide was particularly noticeable for AUDNZD – a pair that negates the volatile and flippant changes in speculative interest and focuses on rate forecasts. There is reason to be concerned about the kiwi’s strength with 4Q CPI due next week and seen cooling to 2.6 percent.

Australian Dollar Tied to Risk Trends but Data Glut Ahead

A strong connection to risk appetite trends can lead to pretty dramatic swings in active markets - AUDUSD has certainly proven that to be true over the years. Yet, that extreme focus can also anchor pairs that would otherwise respond to other catalysts. We will see the influence of risk trends at work on the Aussie dollar heading into next week as we face data on jobs, confidence and other factors – all rendered impotent.

Gold Simply Can’t Muster the Volume to Give Conviction to Trend

Bulls and bears are probably so fed up with the market’s lack of activity that they are probably rooting for the metal’s rally to fresh four-week highs, but there simply isn’t any conviction to the drive. Looking at futures volume as a sign of participation in the prevailing rally, we note that the 20-day (month) average on daily turnover is testing its weakest levels since September of 2010. Not a strong sign of continuation.

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

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