Dollar Steady as Speculative Interest Returns, Watching 1.2900

• Dollar Steady as Speculative Interest Returns, Watching 1.2900
• Euro: Has Weak Data for Spain, Delayed Action on Greece Bought Time
• Canadian Dollar Drops, USDCAD Above 1.0000 after GDP Figures Miss Mark
• British Pound Advances Market Wide on Sentiment Drop, EU Discord
• Japanese Yen Showing the Correct Response to Stimulus, Moody’s Warning
• Australian Dollar Finds No Lift from Local, Chinese Manufacturing Reports
• Gold Has No Momentum in First Swing Higher in Four Weeks

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Dollar Steady as Speculative Interest Returns, Watching 1.2900

As anticipated, New York’s return to the capital markets had encouraged a tentative buildup in ‘risk trends’. With speculators looking to a return to full liquidity, we saw EURUSD move above 1.3000 and the S&P 500 advance towards 1,425 (both decisive risk moves). Yet, it is telling of what the influx really meant to the capital markets that both the most liquid currency pair and benchmark equity index both reversed course through US trade. Just because we now have a more fluid transmission of sentiment trends from one session to the next doesn’t mean that confidence will actually improve. Though trading conditions are not fully back to normal, we are close enough that we once again are returning to the same dominant themes that have offered us a bearing over past week. Broken down into return potential and uncertainty / risk, investor sentiment remains in an extremely vulnerable position. Benchmark yields are hovering just off historical lows, tolerated because Forex Volatility stands at five year lows. In today’s session, we will watch a global round of manufacturing data for catalyst. Then, Friday, we have NFPs.

Euro: Has Weak Data for Spain, Delayed Action on Greece Bought Time

There was nothing encouraging about the Euro’s fundamental docket this past session. Perhaps the best indicator to cross the wires Wednesday was the Greek retail sales report for August which fell at ‘only’ a 7.2 percent pace. There was some positive spin given to the Spanish current account surplus (only the second since the country joined the euro), but the suggestion that this is a precursor to a lasting economic recovery is beyond optimistic. Nevertheless, in this indicator we can see where the market finds a silver lining for the Euro: an opportunity to buy time. Without intensification on Spain’s front of the Eurozone crisis, Prime Minister Rajoy can push back his request for a rescue. Similarly, Greece’s budget and growth forecasts drew guffaws, but suggestion that they will reconvene November 12 buys two weeks.

Canadian Dollar Drops, USDCAD Above 1.0000 after GDP Figures Miss Mark

The Canadian dollar has run on an impressive round of fundamental development these past weeks. However, with encouraging updates (like the Bank of Canada’s determination to keep a hawkish bearing) drawing limited strength for the currency; there is a fundamental bias showing through. A tame reaction to bullish news either denotes a staid market – or a bearish one. Well, we were able to test the other side of that balance this past session with a disappointing round of GDP figures. Tough only for August, the 0.1 percent contraction on the month represents the first contraction since February and pulls the annual rate to its slowest pace since January 2010. Now, on to Friday’s job figures.

British Pound Advances Market Wide on Sentiment Drop, EU Discord

The sterling was the strongest major this past trading session. That is an interesting outcome for the currency when risk trends, stimulus efforts and interest rate forecasts are typically guiding the overall currency market (none of these particular drivers really comes into play with the pound). Traders should note that GBPUSD rallied up to 1.6140 (significant resistance) and EURGBP retreated to 0.8030 (a three-month rising trendline). Though a notable move, the next phase requires a greater level of sincerity from bulls. ON the fundamental from the GfK consumer confidence survey slipped to a six month low (the series has long shown a net negative view). Far more interesting is the news that the House of Commons passed an amendment calling for Prime Minister Cameron to push budget cuts at the EU meeting later this month. Better fire break?

Japanese Yen Showing the Correct Response to Stimulus, Moody’s Warning

Initially, the Japanese yen rallied after the news that the Bank of Japan had increased its stimulus efforts. Those that have watched the US dollar long enough, know that such an outcome is highly unusual. Boosting stimulus theoretically bolsters investor sentiment (which works against safe haven and funding currencies) and increases the money supply. This initial rally was likely due to the market expectations for something more robust given policy officials demands – which the 11 trillion yen increase simply did not live up to. Yet, this morning, we find the yen is firmly under water as investors contemplate the implications of the ancillary program for unlimited funds to commercial banks being offered for up to four years (more like the BoE’s Funds for Lending or the ECB’s OMT?). In the meantime, a reminder from Moody’s that Japan’s lack of a budget deficit plan was a credit threat to the country.

Australian Dollar Finds No Lift from Local, Chinese Manufacturing Reports

Given the reluctance in risk trends this past session, the Forex market’s highest-yielding major wouldn’t find much fundamental drive this past session. The correlation between AUDUSD and standard risk appetite trends (using a 20-day correlation between the Risk-Reward Index I’ve made), has recovered sharply these past few weeks. However, if sentiment trends are reserved themselves, that fundamental connection will act like an anchor rather than a catalyst. For rates, the 12-month rate forecast is only calling for 72 bps worth of cuts. That is a disappointing position for a carry currency, but a significant improvement from the 115 bps expected over the same period just three weeks ago. On the data front, Aussie manufacturing activity for October was better than expected but still below the growth mark (50.0). The Chinese PMI figure besting expectations similarly draws dubious stares from FX traders looking for export demand.

Gold Has No Momentum in First Swing Higher in Four Weeks

Technically speaking, gold’s 0.65 percent rally Wednesday was the biggest in four weeks; and it graduated a pattern of congestion for the metal to mild, bullish progress. However, this is hardly a convincing recovery from the precious metal and alternative store of wealth. To make the transition from an errant shift caused by a rebound in trading volume to a lasting bull trend, we need to see a definitive reason for capital to make the shift away from traditional currencies. On that front, we are in something of a stimulus slump. The Bank of Japan’s 11 trillion yen increase to its asset purchase program seems to have drawn little interest from metal traders (even when we price the commodity in the currency). On the trading front, futures volume picked up markedly from the opening 48 hour lull; yet it didn’t stand out from activity levels over the past two weeks. If a serious move were developing, we would expect the CBOE’s gold volatility index to pick up, but at 15 percent, it is just off multi-year lows.

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

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