Dollar Suffers its Biggest Drop in Month, Not a Signal of Trend

• Dollar Suffers its Biggest Drop in Month, Not a Signal of Trend
• Euro Interest Outpaces Sentiment Climb, Threat of Collapse Builds
• Swiss Franc Surges Across the Board – The SNB Just Can’t Win
• British Pound Climbs Alongside Euro, Risk as GDP Figures Approach
• Australian Dollar In the Mood to be Reassured by RBA Stevens
• Canadian Dollar: Can BoC’s Carney Move the Market?
• Gold’s Rally Cools as Risk Appetite Improves, Greece Fears Ease

Dollar Suffers its Biggest Drop in Month, Not a Signal of Trend

Both risk appetite trends (represented by carry trade interest and the S&P 500) and the Euro fundamental consensus improved through the morning trading hours Friday. And, though the advance on both fronts wasn’t convincing of a second wind in a dominant trend, the combined impact for the dollar was its biggest single-day drop in a month. In the absence of a singular, dominant fundamental trend; a combination of issues can deliver a comparable impact for a currency that finds itself on the extremes (like the primary anti-euro and liquidity providing greenback). That said, a cobbled-together fundamental drive lacks the endurance of a core, thematic trend. What does that mean for dollar bears? Without a renewed drive from the S&P 500 to new multi-year highs or a surge from the euro in the lead up to next week’s lending program (more on that below), the dollar’s tumble will stutter and stall.

For the final day of the trading week, it will be difficult - though not impossible - to incite a major shift in speculative capital. Aside from the vague threat / recovery potential for the Euro Zone’s financial health, US docket carries secondary indicators (new home sales and the second reading of the University of Michigan’s consumer sentiment survey). Perhaps the round of Fed speakers on tap for US economic health and monetary policy commentary can play to the stimulus influence in the prevailing capital markets bull trend.

Euro Interest Outpaces Sentiment Climb, Threat of Collapse Builds

The euro managed an advance against all of its major counterparts (with a minor exception of a 0.02 percent drop against the franc) Thursday. Particularly interesting of this performance is that it denotes that the shared currency outpaced its high yield counterparts – or in fundamental parlance: the improvement in the Euro financial crisis theme outpaced the climb in general risk appetite trends. In turn, the euro hit a two month high against the dollar, sterling and the Canadian dollar (a safe haven, European counterpart and investment currency respectively). Yet, this strength seems increasingly suspect when measured against the trouble that the region faces. Fear surrounding ‘implementation risks’ for Greece’s second bailout program is headline material. Though the EU ministers agreed to the program in principle, there are many ways that the country could fail to secure the package – and even if they do, longer-term issues remain. IMF officials remind us that the 120 percent debt-to-GDP target is a ‘best scenario’ situation. Adding insult to injury, it is believed that the group will not increase its contribution to Greece’s rescue beyond the €30 billion originally promised. And, taking it even further, European Commission released its growth forecasts for the region. The Euro Zone outlook now calls for a 0.3 percent contraction, while Greece, Italy, Spain and Portugal are seen pitching into recession. However, all of this can be counteracted if speculative interests focus on the second LTRO liquidity injection scheduled for February 29th. Recent history has shown us that few things can encourage temporary risk taking as effectively as a stimulus program.

Swiss Franc Surges Across the Board – The SNB Just Can’t Win

As mentioned above, the Swiss franc was the one currency that held off the euro’s advances this past session. Against most other counterparts, the currency posted an impressive advance to multi-month highs. That seems an unusual outcome considering risk appetite alleviates the demand for safe havens and the euro’s implied fundamental stability would suggest capital would be moving away from the franc. If all the expected considerations are lined up for a slide and the currency fails to comply, what hope is there for it to drop should risk aversion and anti-euro sentiment return? Clearly, the SNB’s threat carries limited weight for the market. Unless the central bank expands its efforts to something more proactive than simply buying euros should we reach 1.20, the EURCHF will remain a constant threat of overrunning the bank’s efforts.

British Pound Climbs Alongside Euro, Risk as GDP Figures Approach

Having a fundamental and financial connection to the euro can be a burden and a boon. With the shared currency’s climb this past session, the sterling would breathe a sigh of relief from the overbearing threat of a regional crisis. That said, the pound’s buoyancy was far more reserved than its larger counterpart – as is evidenced by EURGBP’s extended run. Expectations for further BoE stimulus doesn’t cut it as an explanation for this pair as the ECB’s efforts are far more expansive. In the upcoming session, we’ll look at the details of the 4Q GDP figures.

Australian Dollar In the Mood to be Reassured by RBA Stevens

There were two sets of fundamental headlines for the Australian dollar, and more unexpected series seemed to have the lesser impact. Keven Rudd (resigned foreign minister) followed up on his threats by announcing his intentions to challenge Prime Minister Gillard’s Labor leadership at the February 29th ballot. Yet, the Aussie dollar hasn’t shown a blip in response to this ongoing development. Alternatively, the absence of a direct threat of further rate cuts from RBA Governor Steven’s assists the currency higher. The difference: the market is already on a risk appetite kick.

Canadian Dollar: Can BoC’s Carney Move the Market?

Though the Canadian dollar enjoys much of the respect that its Australian and New Zealand counterparts earn as prime carry trader currencies, it falls far short when it comes to genuine yield. Not only is the Candian benchmark rate at a 325 bp and 150 bp discount to the AUD and NZD respectively, its money market and bond yield differentials are just as sizable. Is it commodities that keep this currency riding the proverbial coattails? Perhaps BoC Governor Carney will shift the focus back to the rate differential when he discusses monetary policy.

Gold’s Rally Cools as Risk Appetite Improves, Greece Fears Ease

The trend is intact. Gold climbed for a fourth consecutive day through Thursday’s close to extend the best run for the commodity since the five-day series ending January 5th. That said, momentum cooled markedly in this most recent push. While the dollar’s retreat was a meaningful booster for the anti-fiat asset, tempered interest in Europe’s financial troubles pulled up on the safe haven reins. Perhaps the expectation of more stimulus next week (the ECB’s second LTRO) can keep the trend in place even if momentum spills off somewhat…

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

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