Dollar Posts Relief Rally from 1.3125, Not Yet a Trend

• Dollar Posts Relief Rally from 1.3125, Not Yet a Trend
• Euro Climb Stalls Where Momentum Counts Most: EURUSD, EURJPY, EURAUD
• Australian Dollar Rally Keeps Crawls Higher, AUDUSD Falls out of Line
• Canadian Dollar: CPI Data May Add Weight to Carney’s Dovish Turn
• Japanese Yen Declines Against Most Crosses on a ‘Risk Off’ Day
• Oil Continues to Cut a Progressively Smaller Range, Will Risk or Data Force Break?
• Gold Rebound Fails with Dollar Bounce, Absence of Stimulus at EU Summit

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Dollar Posts Relief Rally from 1.3125, Not Yet a Trend

The weight of resistance that caps 5-month and 4-year highs for EURUSD and US equities respectively has proven too serious for bulls to overtake on this week’s fundamentally-lacking drive. The question now is whether we reverse course or merely stabilize. Following the progress, risk appetite trends had decelerated as this week wore on and they had essentially leveled off heading into Thursday. The Chinese GDP figures earlier in the day (neither good nor bad with in-line readings at three year lows) set a tone of hesitation. The first move towards an active correction came well into the New York session when the market was jolted by Google earnings. The market has all but ignored the 3Q US earnings season up until this point as the headline figures were printing ‘better-than-expected’ reads against a backdrop of stagnant growth, sales and return. Yet, when the technology company’s (the fourth largest corporation by market cap in the world) EPS shortfall hit the wires well before they were expected, a rapid selloff dragged broader indexes – and sentiment – along with it. The docket is light through the last 24 hours of trade this week after EU officials precluded any chance of serious progress on Europe’s crisis. It may not rally, but the dollar will likely hold.

Euro Climb Stalls Where Momentum Counts Most: EURUSD, EURJPY, EURAUD

It looks like EURUSD won’t see five-month highs now will EURJPY overtake 105 before the end of the week. The euro’s climb this past week has come on particularly dubious fundamental support (mostly rumor that has both had a favorable and unfavorable tone), but now we are looking at the end game for the speculation build up. The EU Summit will either vindicate or invalidate optimism. We supposedly still have a second day to the meeting Friday, but the commentary to come out from the first day suggests nothing will be done. After an extended meeting, it was clear that policymakers made no progress on the trouble points that investors cared most about. On Greece, officials merely said they were content with the progress made between the country and the Troika (nothing on that bond buyback speculation). For Spain, they stated said that bank recapitalization would be decided in the coming weeks and a national bailout wasn’t even discussed. In sum, nothing.

Australian Dollar Rally Keeps Crawls Higher, AUDUSD Falls out of Line

With the exception of the greenback, the Australian dollar posted an advance Thursday against all of its major counterparts. That is a remarkable performance given the shift in sentiment trends through the day. Risk aversion would kick in particularly with the New York trading session, but given the hesitation in committing to a ‘risk off’ theme, the currency was able to borrow strength from other fundamental taps to keep its buoyancy. The positive winds from China’s in-line 3Q GDP figures from Thursday morning (though the weakest pace of growth since 1Q 2009) aligned to the better retail sales, factory activity and fixed investment numbers. This morning’s FDI figures, however, end that trend.

Canadian Dollar: CPI Data May Add Weight to Carney’s Dovish Turn

Earlier this week, Bank of Canada Governor Mark Carney offered a more dovish tone on his monetary policy outlook that what the market had become accustomed to over the past months. A highlight from his comments (and a common vow from central bankers) stated that the central bank would do what was necessary to meet the country’s 2 percent inflation goal. That said, we are now heading into September’s CPI figures. With that benchmark in mind, we should note that the annual, headline figure is expected to print a 1.3-percent pace (a modest pickup). For the core figure, the market is expecting a slowdown to a 15-month low 1.4 percent clip. The market isn’t pricing in cuts. We have the BoC next week.

Japanese Yen Declines Against Most Crosses on a ‘Risk Off’ Day

The Japanese yen was a mixed bag Thursday. Modest gains against the pound and Canadian dollar are to be expected on days where ‘risk aversion’ is the ultimate them of the session. Yet, the balance of the major yen crosses were in the green. USDJPY and AUDJPY showed the most progress (which could be attributed to individual strength), but the lack of yen appreciation against the kiwi, Swiss franc and Euro generally contradicts expectations for the fundamentals fundamental role. What this boils down to is a unique weakness to the yen itself (also insinuated with the USDJPY individually). The threat of consistent intervention and private cross-boarders investment may be finally gaining traction with lowering the funding currency. This morning Fin Min Jojima said the Cabinet will decide this month what to do with reserve funds…intervention?

Oil Continues to Cut a Progressively Smaller Range, Will Risk or Data Force Break?

Volatility (price-based rather than those indexes measured through options) has certainly picked up this week for capital and FX markets. And yet, oil seems to have done exactly the opposite and completely lost all momentum. In an interesting measure of activity, oil futures have closed out five-consecutive days where the change was less than 0.50 – the longest string since at least 2008. A more common measure of activity, the CBOE’s Oil Volatility Index dropped for a third consecutive day to its lowest level in two months (30.8 percent). We have weathered extended periods of inactivity these past months, but the lack of volatility and progress was sustainable because the broader market was lacking for consistency. Recently, we have seen other asset classes step up their own turnover and (though clear trend is still elusive). It is difficult for any individual asset to deviate from the broader market, but anchoring price action when volatility is picking up across the board is most difficult.

Gold Rebound Fails with Dollar Bounce, Absence of Stimulus at EU Summit

Gold’s bearish shift these past few weeks is looking more and more permanent. This past session, the metal put an abrupt end to its rebound effort and left the 1750 handle behind. The only consolation for bulls was that the switchback was suffering from the same lack of momentum that the bounce featured. In fact, looking at the activity levels for the commodity, the 5-day average daily range (ATR) was at its lowest level in over two years. Offering a similar view, the CBOE’s Gold Volatility Index marked its lowest close in the series’ history (going back to 2008). Fundamentally speaking, gold’s slip is (arguably) most-heavily influenced by the dollar’s bounce. The world’s reserve currency stands in as the proxy for all fiats – so a rise for the greenback tells global investors they don’t need to scramble into an alternative store of wealth that is expensive, volatile and lacking for yield. Another selling point for gold was the lack of progress from the EU Summit. Though there was limited expectation for a surprise Spanish bailout at this meeting, its absence was nevertheless felt by the currency debasement crowd.

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

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