FOREX: Dollar Rallies on Critical Risk Turn, Heavy Data Until 1.2800

• Dollar Rallies on Critical Risk Turn, Heavy Data Until 1.2800
• Euro Ignores Rumor of EU Extension for Greek Debt Repayment
• British Pound Stumbles on Risk Trends, BoE King’s Stimulus Warnings
• Australian Dollar Surge on Strong CPI Data Brief, Well Short of 1.0300
• Canadian Dollar Rallies after BoC Governor Maintains Hawkish Bias
• New Zealand Dollar Bulls Hope for the Same Hawkish View as the BoC
• Gold Hits Six-Week Low as ETF Interest Levels Off, Dollar Rallies

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Dollar Rallies on Critical Risk Turn, Heavy Data Until 1.2800

There are very few fundamental scenarios where the US dollar can upgrade a breakout into a lasting bull trend. And yet, we are starting to see just the right mix of market and economic development to carry the benchmark currency to a structural, bullish phase. The first step in a greenback advance began Monday with the Dow Jones FXCM Dollar Index (ticker = USDollar) clearing the top of its four-month descending trend channel. Yet, this technical move was still lacking a serious fundamental catalyst that would keep capital flowing into the extremely low-yielding currency. That changed this past session. To keep investors moving against the current of seeking higher yield, the global scales on investor confidence must be tipped by ‘risk’. The high-profile breach of support and trend reversals by two of the most popular US equity indexes provided just that. With the S&P 500 breaking 1,425 and the Dow Jones Industrial Average tumbling below 13,300 (on the biggest daily decline in four months), we have seen a serious shift in confidence. US equities don’t just represent investor confidence, they reflect stimulus hope.

Though there was plenty of fundamental pressure behind the Dollar Index’s lone break (growth forecasts, the prevalence of developing financial crises, extremely low yields, etc), such a move would not be able to sustain itself. And as convincing as this upgrade to general risk trends may be, there is still reason to be cautious. Some traders and analysts have pointed out that the drop from equities was based on tepid volume, that the declines themselves were not on the magnitude of slides last year and volatility figures are equally measured in their pick up. That may be true. However the more excessive volume, price and volatility moves are; the more quickly they burn themselves out. Lasting trends have points of acceleration but they are typically more even. The economic-side of fundamentals is the bigger threat to a sustained dollar rally.

The outlook for global growth, rates of return and financial stability do not look particularly promising through the immediate future; but there is plenty of opportunity for developments to generate enough ‘relief’ from immediate concerns to stall a deleveraging effort and send the market back to its passive and habitual chase for anemic returns. Buying time on the Euro-area crisis (pushing back Spain and Greece timetables), China’s bubble (a new round of stimulus) and even US business sector drain (accounting) is a familiar effort. However, the most immediate threat to a EURUSD run to 1.2800 may be the Fed. Though they just recently introduced QE3, there is speculation that an increase to the program may be in the works ahead of Operation Twist’s expiration by year end. Yet, that may also be a point to crush hopes on.

Euro Ignores Rumor of EU Extension for Greek Debt Repayment

The euro was under a heavy run of news this past session, and the docket will not relent through the upcoming session. Most of what we were offered for trading fodder this past session was rumor and headlines. On one side we heard German Finance Minister Schauble suggest that we may not have seen the worst of the Euro-crisis, while on the other German paper SZ (quoting an unnamed source) claimed EU officials had agreed to give Greece an extra two years (2016) to reach the required 3 percent debt-to-GDP ratio. Coming up, we are more data concentrated. Following on the mild bounce from the three year low in consumer confidence, we are watching the PMI figures as timely growth readings.

British Pound Stumbles on Risk Trends, BoE King’s Stimulus Warnings

The sterling’s fundamental position is a fine balance of regional safe haven to the Euro Zone and liability to global investors should the contagion spread. This mixed position showed through in the sterling’s performance as it advanced against high the high yield currencies but dropped against dollar and yen. Though not as critical as other players, policy warnings by BoE Governor King (contemplating more stimulus) weighs.

Australian Dollar Surge on Strong CPI Data Brief, Well Short of 1.0300

Though the extent of its move is modest, the Aussie dollar is up across the board early Wednesday. The heavy run of risk aversion that has dug in this past day has certainly weighed the most carry-intense pairs, but there was a surprising level of restraint from pairs like EURAUD. That buoyancy translated into outright strength with the release of the 3Q CPI figures which reported a 2.0 percent headline reading (well above expectations). The Chinese PMI manufacturing report would also best expectations and help the Aussie. If risk aversion carries though…

Canadian Dollar Rallies after BoC Governor Maintains Hawkish Bias

Comments over recent weeks from the Bank of Canada along with softer inflation data last week (the 1.2 percent figure is well below target) leveraged expectations that the central bank would back off its hawkish bias. Instead, the group was more aggressive on removing accommodation than originally stated. With upgraded growth and inflation forecasts, the statement said a hike in rates would ‘likely be required’ through the foreseeable future. The market’s rate forecasts were still low going into the event, so expect adjustment.

New Zealand Dollar Bulls Hope for the Same Hawkish View as the BoC

The third of the major central bank meetings this week will be the RBNZ’s gathering Wednesday at 20:00 GMT. Unlikely with Australia’s data, New Zealand’s 3Q CPI figures continued to tumble with a 0.8 percent figure (lowest since 4Q 1999) sharply below the target band. Alternatively, we have seen that the New Zealand central bank has held a bias similar to the BoC with a lean towards removing accommodation rather than add to it. This is a mixed rate forecast that has to fall one way or the other. And, a reduced yield during ‘risk off’ can seriously hurt the kiwi.

Gold Hits Six-Week Low as ETF Interest Levels Off, Dollar Rallies

Gold has dropped nearly 90 points from the multi-month high set earlier in October. Standing just above 1700, the precious metal is at six-week lows and support is quickly failing. Those drawing confusion as to the metal’s retreat against standard risk aversion trends, that is not the type of safe haven that the market seeks during these conditions. The dollar provides liquidity, and its strength is gold’s weakness. For market readings, we see ETF interest has leveled off and futures open interest is dropping (speculators are retreating). Can central bank interest compensate?

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

To contact John, email jkicklighter@dailyfx.com. Follow me on twitter at http://www.twitter.com/JohnKicklighter

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