Dollar: A Sharp Move Against Euro Doesn’t Ensure AUDUSD Drive

• Dollar: A Sharp Move Against Euro Doesn’t Ensure AUDUSD Drive
• Euro Ready for Breakout with the ECB On Tap
• Australian Dollar Reversal Requires Rate Deterioration Ease or Strong Risk Rally
• British Pound Likely to Ignore BoE Rate Decision to Watch ECB Efforts
• Japanese Yen Moving Closer to Long-Term Bear Trend
• Canadian Dollar Drops Despite Hawkish BoC, Breakout Opportunity Ahead
• Gold Ready to Run Regardless of Direction as ECB Feeds Stimulus Speculation

Dollar: A Sharp Move Against Euro Doesn’t Ensure AUDUSD Drive

The week’s top event risk is at hand, but don’t expect the ECB rate decision to just carry an impact for EURUSD and the other euro-based crosses. As the greatest threat to global financial market stability, a significant update to the Euro-area debt crisis fight hold tremendous implications for the risk appetite trends. Whether through the most liquid currency pairing in the world or the underlying current of investor sentiment, Thursday’s headlines present a serious threat to a quiet dollar. For the Dow Jones FXCM Dollar Index (ticker = USDollar), boundaries of 10,050 and 0.9950 are too close to withstand a serious drive. That said, a breakout and trend development are two separate concepts. A sudden influx of volatility and technicals squeezed by tight ranges over the previous month can certainly leverage the former condition. For momentum to take, however, the rate decision would need to encourage a fundamental shift in the elemental themes of the market: such as risk appetite. And, while it can certainly stir speculation-linked to stimulus hopes (a considerable driver nowadays), a little more clarity on the European authorities options won’t seismically shift market-wide efforts.

And so, while we can expect volatility from both EURUSD and AUDUSD, the more risk-dependent pair (the latter) is more likely to see volatility dry up earlier and curb momentum more readily. The dollar-based pairs will further find restraint from the event risk that is on the docket the following day and week. The Fed rate decision next week holds far more clout for stimulus hopefuls – and in that sway risk and greenback will be distracted. Yet, for the more immediate future, Friday’s NFPs will act as a break on all but the most aggressive rallies on a Euro-area event. The employment report itself is historically disappointing as a market-mover, but its lead up is shockingly effective at taming price action.

Euro Ready for Breakout with the ECB On Tap

All the stars have aligned for those trading the Euro. Extremely narrow trading ranges on both EURUSD and EURJPY await the impact of perhaps the biggest economic catalyst the shared currency has faced in months: the ECB rate decision. Mixing these tumultuous ingredients virtually guarantees a breakout. Many traders are heading into this considerable opportunity worried first and foremost about direction. However, we should be more concerned with activity level. On the eve of the central bank’s policy announcement, we find the world’s most liquid currency pair carving out little more than a 100-pip range with the lowest average daily range (20-day or one-month average) since May. My preferred event risk play (EURJPY) has a similar but more well worn range and an ‘ATR’ that is the lowest we have seen since the beginning of the year. There are multiple outcomes for the rate decision itself and further complications imposed in making-or-breaking market expectations. Knowing that there is a range, a clear break would insinuate full market processing and a view for direction.

In the ECB’s rate decisionitself, market impact has been leveraged by heavy speculation for additional progress on the crisis fight (had the policy authority remained mum, there would likely be very little volatility surrounding the event). Heading into the event, a change to the benchmark rate is not the issue. In fact, neither is an alteration of the nonstandard efforts (bond purchases specifically) an issue. The crux of speculation now is the details for future plans on intervention. The current consensus is for ECB President Draghi to offer details on a plan to purchase unlimited, short-term government bonds to aid sovereign yields. More or less (detail and scope) will set the stage for ‘better’ or ‘worse’.

Australian Dollar Reversal Requires Rate Deterioration Ease or Strong Risk Rally

The Australian dollar’s pummeling continues. AUDUSD hit a fresh two-month low and GBPAUD has moved its record-breaking bull run to a record 12 consecutive bullish days. It is easy to label the currency ‘oversold’ and project a snap back, but we need to know the fundamentals that would support such a move. There are two catalysts for the Aussie dollar: risk trends and rate expectations. The 12-month RBA rate forecast hit a new low with more than 100 bps worth of cuts, though fundamentals haven’t really supported the dovish outlook. A turn on this front, however, is the less risky part. If risk trends falter in the immediate future, a new pressure will be added to Aussie dollar selling.

British Pound Likely to Ignore BoE Rate Decision to Watch ECB Efforts

There is a lot of volatility potential packed into the ECB rate decision or the Euro, but the pound is unlikely to draw the same level of influence from its own central bank decision. In fact, if we are to see GBPUSD clear 1.5900 or reversal back below 1.5800, it is more likely to be the result of the ECB policy decision. The market knows the BoE is quiet with no changes, and previous policy efforts were immediately overlooked.

Japanese Yen Moving Closer to Long-Term Bear Trend

Fundamental traders know that the Japanese yen is overbought through the long-term and will eventually see a significant depreciation. The question has always been the timing. There are two primary developments that can turn USDJPY back towards 100: a rebound in US yields to make it a viable carry trade or the undermining of the Japanese safe haven appeal. In the more immediate future, however, we have a few other considerations. Yesterday we heard the DPJ’s platform included proposed foreign bond purchases while the Nikkei warned of retail unwinding.

Canadian Dollar Drops Despite Hawkish BoC, Breakout Opportunity Ahead

In a world where we are discussing a bullish reaction to policy decision via stimulus (extreme easing), the Bank of Canada stands out as the only major central bank still discussing hikes. The policy authority reiterated its suggestion that further hikes may become ‘appropriate’ moving forward, yet the news didn’t prevent the Canadian dollar from dropping. USDCAD is now facing risk trends and NFPs with a 0.9915-9845 range.

Gold Ready to Run Regardless of Direction as ECB Feeds Stimulus Speculation

Laying the path for more stimulus from the European Central Bank does not necessarily guarantee a euro rally (on the hope that it will promote stability). That said, it would almost certainly further gold’s advance. More stimulus from the ECB means devaluation of the second most liquid currency. There is no doubt, that a lot has been priced in; but a clear route towards inflating can push the yellow metal above $1700.

**For a full list of upcoming event risk and past releases, go towww.dailyfx.com/calendar

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

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