Dollar Rally Curbed Again by 1.2825 Support for EURUSD

• Dollar Rally Curbed Again by 1.2825 Support for EURUSD
• Euro Stands at Support Against Dollar, Yen and Pound with Event Risk Ahead
• Australian Dollar Will Break 1.03 If Risk Aversion, Rate Outlook Combine
• British Pound Lures Traders but GBPUSD and GBPJPY Support Still Holds
• Japanese Yen Not Easing on Intervention Warnings, China Row
• US Oil Near Two-Month Lows as Speculative and Growth Outlook Weigh
• Gold Gives a False Break Below 1750 – What Would a Bear Trend Require?

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Dollar Rally Curbed Again by 1.2825 Support for EURUSD

US equity markets – a favored benchmark for investor sentiment – extended a critical break lower through this past session, and volatility measures advanced to three week highs. Furthermore, investors’ go-to capital harbor 10-year Treasury note extended its rally to an eighth day (the longest run since December 2008) while the fundamental headlines ran increasingly dire assessments of the Euro-area crisis, China-Japan tensions and global growth forecast. In essence, we are presented with a fundamentally-comprehensive wave of ‘risk aversion’. That being the case, we would expect the safe haven dollar to rally.

The greenback did indeed advance Wednesday to two week highs and fully reversed its QE3 losses suffered immediately before and after the MBS program was announced back on September 13. However, there is unmistakable hesitance from the dollar. Though the Dow Jones FXCM Dollar Index (ticker = USDollar) posted a higher intraday high and daily close, we find all of its gains fully retraced through the early Asia trading session. Furthermore, we find both restraint in trend development and reticence at important technical levels amongst the crosses - like 1.2825 for EURUSD and 1.6150 for GBPUSD. The speculative ranks are not committing to unwinding their risky positions and abandoning all hope of return for sanctuary. That may be because the markets are responding to short-term factors rather than the more critical ‘themes’.

There are two prominent bearish drivers that the headlines are gravitating towards: reversal of QE3 premium and end-of-quarter flows. A seasonality effect for the capital markets, the end of the third quarter (Friday) is considered a time for fund rebalancing and booking positions for accounting purposes. This is generally considered a selling event in the lead up and buying effort after the transition. Yet, history of the past five quarterly transition periods doesn’t really substantiate that assumption. As for the ‘buy the rumor, sell the news’ on the Fed’s most recent stimulus injection; this is the only EURUSD bull swing we’ve seen in the first two weeks following a major program (versus QE1, QE2 and Operation Twist). That gives the dollar rebound a little more weight, but we need more to turn correction to outright trend.

What the dollar needs to break its near, four-month bear trend is a convincing tumble in investor sentiment. That may not seem difficult given the abundance of problematic fundamental issues moving forward. That said, the extreme lack of yield and benchmarking of prominent events ahead (Q3 earnings, Q3 GDP, US elections, etc) will dampen conviction. What we have moving forward are the ideal conditions for volatility, not trend. That said, potentially extreme swings in markets is a strong argument for a liquidity asset like the dollar…

Euro Stands at Support Against Dollar, Yen and Pound with Event Risk Ahead

Is it the disturbing headlines from the Euro-area’s troubled areas that push the euro to its selloff or the currency’s losses that make the newswires read so bombastic? There is little doubt that the protests in Greece and Spain (turning to violence in some areas) are an inauspicious assessment of the region’s most at-risk members. Not only do the demonstrations reflect growing dissension against measures aimed at stabilizing the entire Eurozone’s financial stability, but they also have a material impact on economic activity. Meanwhile, details on whether Greece receives its next tranche of second round bailout aid (much less win more time or better rates) are in short supply and Spanish Prime Minister Rajoy refuses to ask for a full bailout regional tensions build. This is an explosive situation with EURUSD, EURJPY and EURGBP standing at support (1.2825, 100 and 0.7925 respectively). As we monitor these bigger themes, don’t miss that we have a round of Spanish, Portuguese and Irish economic data due for release over the next 48 hours.

Australian Dollar Will Break 1.03 If Risk Aversion, Rate Outlook Combine

The slide in global shares the past 48 hours has had a clear impact on carry appetite. The Australian dollar has suffered considerable loss against opposing funding currencies. Yet there is another weigh on the Aussies shoulders. With a slide in confidence, we find the 12-month RBA rate forecast at a two-year low (-104 bps) and chance of a October 2 cut (72 percent) at dovish levels not seen since June 15.

British Pound Lures Traders but GBPUSD and GBPJPY Support Still Holds

I am particularly interested in GBPUSD as it has worked its way into the tightest bout of congestion (measured on the lowest average change on a 20-day rolling basis) in years after the longest string of weekly gains since late 2004. The brief dip beneath 1.6150 for the cable was tempting, but the same fundamental concerns that exist for the dollar and euro fall to this pair: persistence in risk trends to sustain a move. So, I wait.

Japanese Yen Not Easing on Intervention Warnings, China Row

Policy officials have made a considerable effort to reinforce the threat that they could move at any time to intervene on the market even if the government is in the process of rotating the Finance Minister position. BoJ member Sato stated that the bank was ready to act as Japan’s future looked at risk from the Euro crisis, China slowdown and global winds. That has as little impact as the China-Japan spat has shown for the yen.

US Oil Near Two-Month Lows as Speculative and Growth Outlook Weigh

US crude dropped for a third day through Wednesday. The 1.5 percent tumble was the sharpest in just a week – but that is statement to how aggressive the commodity’s decline has been over two weeks. Down over 10 percent from its peak just a few weeks ago, its telling that the sharp correction in DoE inventory figures this past session (down 2.45 million barrels) should have little sway in holding the selloff back.

Gold Gives a False Break Below 1750 – What Would a Bear Trend Require?

Eager gold traders may have been tricked into a false move this past session. A quick tumble below 1750 looked like a break of nearly two weeks of congestion and the reversal of the most exceptional bull trend seen since the beginning of the year. Yet, a quick bounce closed the market back above that critical level. What does it take for a bear wave to stick? A sustained dollar rally could do it.

**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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