Dollar Extends its Decline as Dow Index Threatens Surge

• Dollar Extends its Decline as Dow Index Threatens Surge
• Euro Volatility Leveraged by Rumors of a Long-Awaited Greece Agreement
• British Pound Rallies Around Risk, Euro and Gilt Yield Jump
• Australian Dollar Standing Just Below 1.0750 as RBA Comes Into View
• Swiss Franc: 2 Pips Closer to an SNB End-Game, Intervention Watch Continues
• Japanese Yen Gains Against Dollar Despite Risk Appetite, Azumi and Shirakawa Speak
• Gold Rally Now Over 15 Percent, Dollar Weakness Keeps Move Going

Dollar Extends its Decline as Dow Index Threatens Surge

Over the last 13 trading days, the Dow Jones FXCM Dollar Index has dropped 10 of those sessions. By anyone’s standard that is a clear bear trend. Yet, follow through is a measure of conviction, and we are still finding faith in the risk appetite drive lacking for participation. That does not, however, mean a reversal is guaranteed. A low-liquidity build in risk is just as sure-footed as a heavy move as long as their isn’t opposition to the trend. We can pick out multiple thematic reasons why the capital markets and high-yield currencies ‘should’ decline; but unless the masses are on the same page, logic will be decided by the speculative contingent. Through the immediate future, we can look to Bernanke’s testimony as a possible catalyst if he discusses monetary policy (QE3) plans. If not, we will enter the void of the normal, pre-NFPs trading lull.

Euro Volatility Leveraged by Rumors of a Long-Awaited Greece Agreement

The euro put in for wide gyrations yesterday all thanks to the market’s renewed interest in conjecture. We know that the market’s tolerance for rumor can wax and wane – and recently it had eased as the balance between speculation and actual market shifted too far towards the former. However, the headlines apparently touched a nerve when it was suggested that the Greek bond swap program was within ‘hours’ of a deal. While the IIF would later push back the time from to ‘next week’, we can garner from this the market’s focus. Will confirmation of a 70 percent-plus haircut, 3.6 percent coupon and GDP sweetner lead to an actual rally or is much of this already priced in?

British Pound Rallies Around Risk, Euro and Gilt Yield Jump

Is the British pound a high yield currency? That depends on what you pair it with. The sterling managed an advance against the dollar, yen and Canadian currency through alongside the S&P 500’s / FTSE 100’s climb Wednesday. Against the euro and higher yielding comm bloc members, the pound retreated. There isn’t a strong enough fundamental drive emanating from the UK to put the sterling on its own path, but there are certainly some interesting developments to keep track of for medium-term trends. Rate watchers would have noted that the yield on the 10-year Gilt climbed for the first time in six days, but is that encouraging enough to offset a possible increase in BoE bond purchases next week? A more distant concern, the UK factory activity survey for January reported unexpected expansion. Growth is going to be much more important going forward as the bite of austerity clamps down. A think tank’s take before the March budget put it into perspective, the government will attempt to cut spending for seven consecutive years when we haven’t seen two in a row yet. This is a big task.

Australian Dollar Standing Just Below 1.0750 as RBA Comes Into View

With the surge in equities through the past trading day, it should come as no surprise that the highest-yielding ‘major’ moved higher as well. The ‘risk on’ performance put the AUDUSD back on track for its longest running bull trend (six weeks) since March. Heading into today’s Asian trading session, we find the modest pullback through the second half of the preceding New York session has been replaced by another, more-restrained appetite for yield. Continuing the build in risky positioning from here carries a greater cost. Most equity market indexes are standing just below multi-month support while AUDUSD itself is deciding whether it can hold a triple top at a six month high. Risk appetite will determine whether we break or reverse from here, but Aussie traders should appreciate that we have an expected RBA cut early next week.

Swiss Franc: 2 Pips Closer to an SNB End-Game, Intervention Watch Continues

Another day and EURCHF managed to squeeze out another two more pips from its intraday swing low. The tension surrounding the Swiss franc is thick. The longer the march towards the SNB-imposed 1.2000-floor lasts, the greater the doubt that the central bank will actually move to back up its threat. In turn, fear of inaction can encourage unwinding of long-intervention trades and thereby hasten the decline. However, betting against a central bank that has spelled out its intentions with clear terms is extremely risky. We discussed yesterday that there is a steady safe-of-funds move that will carry this pair lower, but we deferred the conversation of effectiveness in different policy responses. The standing expectation is that the SNB would start in on unlimited euro purchases when 1.2000 is at hand. That could be just enough to maintain the level, but more than likely; it would more than offset Swiss bids to drive the exchange rate higher. Once we found 50-100 pips of separation from the 1.2000, the drive could very well flag to cap costs. Ultimately, this approach would have the shortest-lived impact as anti-euro interest would quickly reassert itself. The next level up in intervention would be to boost the floor. This could deliver a semi-permanent exchange rate loss to the passive safe haven seekers and thereby better discourage future inflows. The most effective tactic would be to impose capital curbs. Placing a tax on incoming capital would diminish Switzerland’s safe-haven appeal and significantly divert inflows. However, this is politically unpopular.

Japanese Yen Gains Against Dollar Despite Risk Appetite, Azumi and Shirakawa Speak

With risk appetite up in a big way across the board Wednesday, the Japanese yen would come under significant selling pressure. In fact, the funding currency took a dive against all of its most liquid counterparts with the exception of the greenback. Historically, any meaningful appetite for yield has been a bullish catalyst for USDJPY. Yet, with the Fed’s threat to keep interest rates near zero (and consequently, real rates of return negative) for the next few years; that dynamic is starting to change. Japanese Finance Minister Azumi noted in his testimony before Parliament that the US central bank’s monetary policy approach was an indirect bullish driver for the yen. Regardless, the jump higher for EURJPY and other crosses helps to relieve a little pressure for Japanese officials. Yet, we aren’t very far from record lows and volatility is high…

Gold Rally Now Over 15 Percent, Dollar Weakness Keeps Move Going

The impressive rally from gold is relentless – and we have central banks to thank for it. Promises from European authorities are curbing fear of a budding, global financial crisis spreading out of the European region. From there, the real drive is provided by the Fed’s effort to keep its rates at rock-bottom lows though the foreseeable future. Though stimulus encourages growth, it also spurs inflation concerns. And, higher prices translates into a weaker currency. The dollar’s multi-week decline is particularly encouraging for the anti-currency metal. That said, should general risk trends falter; it could prove a boon for the greenback. And any boost for the dollar is a weight for its primary, non-FX alternative.

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

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