Forex: Dollar Posts Lowest Close in Three Months, Flirts With Collapse

Talking Points:

• Dollar Posts Lowest Close in Three Months, Flirts With Collapse
• Euro Find Limited Optimism in Greece Growth Forecast
• Japanese Yen Turns the Screws Monday, Impending Risk Breakdown

Dollar Posts Lowest Close in Three Months, Flirts With Collapse

The Dow Jones FXCM Dollar Index (ticker = USDollar) closed in the red to start the week. This represents the sixth drop from the benchmark currency in the past seven trading days. While technically the biggest percentage drop for the dollar in over two weeks, the move falls short of initiative the next ‘bear phase’. Technical traders will refer to 10,475 as an important line in the sand, but the fundamentalists await a definitive catalyst that will lend follow through to any tentative drives through technical boundaries. To that higher-level concern, there are two means for establishing that speculative course: development through the US deficit / budget standoff and/or a sudden drive in risk trends.

On the topic of the financial uncertainties facing the US fiscal landscape, the headlines are growing more dramatic and bleak. While the October 17 may not be the exact day that the United States’ will begin prioritizing its payments, it is a date for global investors to benchmark their confidence to. In this worst case scenario – the US technically defaults on some of its obligations – we are looking at a systemic change in the way that risk is priced and transmitted through the financial system. Will we get to this point? Itis still a low probability, but the risk is too great to ignore. Meanwhile, we should watch for flare ups in risk trends outside the headlines from Washington. Coming up today, the IMF is set to release its economic forecasts, Fed officials are scheduled to speak and the US will sell important 1-month bills (within default zone).

Euro Find Limited Optimism in Greece Growth Forecast

News of growth and stability from the Eurozone seems to fall flat – surprising considering the euro itself seems otherwise immune to negative developments as well. Perhaps the most encouraging update through the opening trading session of the week was Greece’s updated growth forecast for 2014 in its most recent budget. A 0.6 percent expansion for the government according to the government’s figures would represent the first period of growth for the country in six years. As we would expect, the market remains skeptical with 10-year yields still above 9 percent and default swaps still over 930 basis points. Meanwhile, the Sentix Euro-area investor sentiment index unexpectedly slipped from a two-year high. Coming up, we have the Italian government planning to lay out its budget plan to the Senate.

Japanese Yen Turns the Screws Monday, Impending Risk Breakdown

The yen was the best performing currency of the opening session this week. An advance between 0.3 (GBPJPY) to 1.0 percent (CADJPY) reflects a close performance to equity markets. Risk trends are starting to tremor, and the dollar is not exactly the ideal currency to flee to – not unless there is a panic that induces a blind scramble for liquidity. Anemic carry does little to sooth a threat of deleveraging and high volatility. The VIX has soared to 19.4 percent – the highest since late June. If this ‘fear’ is realized, the yen crosses will catalyze retracements.

British Pound Advances on Industry Report, Leveled Yield Forecast

Though its docket wasn’t particularly dense and gilt yields didn’t advance with gusto, the sterling was one of the best performers on the day Monday. Of particular note was the GBPUSD rebound from 1.6000 – pulling the pair back from a bearish ‘reversal’ label. Helping the sterling out on the day was an industry report – the Confederation of British Industry’s financial services firms’ sentiment survey – that showed the highest level of optimism since 1996. According to the report 59 percent of those surveyed were more optimistic about the state of their business moving forward, while 24 percent reported an increase in their payrolls through the past quarter. As encouraging at the report is, though, it will not usher cable back above 1.6250. The focus is turned forward to Thursday’s Bank of England (BoE) decision where the market will look for some sort of approval of their ambitious rate forecasts – which they are unlikely to find.

Swiss Franc: Will SNB President Jordan Intensify EURCHF Threats?

It is ironic that Swiss regulators were investigating whether large regional banks were attempting to manipulate exchange rates. It is difficult to move a $5 trillion-a-day market, but the Swiss National Bank (SNB) has proven one of the most effective conductors of unnatural exchange rates in recent years by maintaining a 1.2000-floor underneath EURUCHF. Meanwhile, the two-year government bond is yielding -0.025 percent; and yet, the franc has gained against all its major counterparts with the exception of the New Zealand dollar over the past month. With USDCHF in particular at 19 month highs and EURCHF below 1.2300, the pressure is rising again. The FX market will look to SNB President Jordan’s planned speech at the Peterson Institute today at 16:30 GMT to see if he escalates the verbal threats at all.

US Oil Testing $102 as Brent Spread Widens, Demand Update Due

The price-based, 20-day (1 trading month) rolling correlation between the USDollar and US oil reached 0.67 – the strongest positive relationship between the two since the beginning of the year and a level that has reflected a peak in these assets’ relationship over the past decade. US crude (WTI) is priced in dollars and is considered a speculative asset, so the relationship is typically negative. That said, the trouble leveraged upon the benchmark currency due to its exposure to a possible US-based debt crisis has skewed the relationship. That being said, expectations of a trimmed growth outlook for the world’s largest economy and consumer of natural resources maintain a straightforward fundamental relationship between price and fundamentals for oil. Meanwhile, the US Department of Energy (DoE) will release its short-term demand outlook for October tomorrow at 16:00 GMT.

Gold Heading for a More Substantive Breakout

We have witnessed a few breakouts these past weeks in gold – particularly around $1,300. However, fundamental timing and technicals is coming together to possibly force a far more significant shift in positioning behind the precious metal. From the chart side, the 20-day moving average defines the momentum of a descending trend since late August while $1,275 has held the floor on bear for three months. What makes an impending resolution to this now $55-range more foreboding is the fundamental backdrop. An impending US debt crisis that ends in either financial seizures or a temporary rebound in speculative appetites will translate into heavy seas for an asset that caters to those looking for an alternative store of wealth. Meanwhile, volume in the SPDR Gold Shares ETF has dried up while ETF holdings of the previous metal are currently at 41-month lows (61.81 million ounces) down 27 percent from the December peak.

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

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

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