Euro Hits Two Month High against Safe Haven Dollar, Greece Irrelevant?

Though the Dow Jones Industrial Average was leading risk trends high, the equity benchmark’s pace wasn’t all that threatening for a safe haven like the US dollar. Yet, the trend has been unbelievably consistent – and so too has been the pressure on the currency. Trend was not a surprise for the greenback, rather revived momentum and the near three-month low for the Dow Jones FXCM Dollar Index (coinciding with a two-month high for EURUSD) was. This particular stage of the tumble comes thanks to the euro’s strong performance. Is there anything that stops risk?

Euro Hits Two Month High against Safe Haven Dollar, Greece Irrelevant?

In yet another remarkable turn, the euro was the best performer through Tuesday’s session. That is particularly unusual considering that underlying risk appetite trends themselves – though positive – were relatively tame. If we look for an additional fundamental drive in Euro-specific developments, there is little to suggest genuine improvement. Instead, what we find is a more distant timetable for a financial reckoning for a genuinely troubled region. Keeping track of the region’s primary anchor, a supposed draft of measures crafted by Greek officials to secure its second round of financial aid was postponed for further conversation in the upcoming session. If this discussion is moved once again, it will quickly come into conflict with the EU ministers planned gathering for Thursday (suggested by Germany’s Schaeuble). Though we have heard it before, sometime to keep an eye is the push for European Union members to cede more control to EU authorities – voiced by German Chancellor Angela Merkel. If power sharing must be forced through in the short-term for this situation to stabilize, the euro will be in trouble.

Australian Dollar Rally Cooled Immediately after RBA Hold

When is a bullish outcome to a rate decision not really all that bullish? When the consensus is for a particularly dovish (bearish) outcome, and we are met with only a modest one. That was the position we were in with the Aussie dollar over the past 24 hours. Immediately following Tuesday’s RBA decision to hold the benchmark lending rate at 4.25 percent, the Australian dollar climbed against all of its most liquid counterparts. Yet, the swell didn’t last for very long. The lack of follow through was most prominent with AUDUSD as we witnessed the S&P 500 and EURUSD carry forward meaningful advances through the European and New York session as the carry-favored pair held anchored around 1.0800. In the rate decision itself, we need to realize that the central bank left the door wide open to future cuts. Upon reflection, it makes sense that they take a more restrained gait towards policy easing. The RBA bullishness has been fully spent. Now, we are fully back on risk trends.

British Pound Rallies on Euro Goodwill, Gilt Yields at Two-Month High

The Sterling surged higher Tuesday, riding on the back of both risk appetite and the euro’s own performance. For the benchmark GBPUSD (cable), a strong advance would revive the side-tracked bull trend that began January 13th and bring us up to the mid-point of the August-to-January range. Like the euro, the pound further managed an advance against the high yield currencies (Aussie and kiwi dollars) as well as the safe havens (dollar and yen). However, with EURGBP, we can tell the strength for the regional currencies originated with the shared currency. For the pound, a relief rally from the fear of Euro Zone crisis spillover as well as local recession fears (though neither threat has really dissipated for the medium-term) feeds covering of shorts. A notable highlight in the fundamental background for sterling traders to take note of: the 10 year government bond (Gilt) yield surged Tuesday to nudge two-month highs. This denotes a move away from safety, just like Treasuries and Bunds.

Swiss Franc: SNB’s Jordan Blames EURCHF Pressure on EU Crisis

The Swiss franc is stubbornly strong and it’s the Euro Zone’s fault. At least, that is what we derive from SNB acting President Thomas Jordan said in his speech this past session. According to the central banker, EURCHF has slowly clawed back towards the forcibly-imposed 1.2000-floor because a flight to safety is encouraging capital to find harbor in Switzerland – regardless of the exchange rate abnormalities. There were no remarkable changes in the tone or quality of Jordan’s comments through the event. The vow to defend the franc’s ceiling was reiterated. In fact, he would remark that living up to that guarantee is more important now than ever. Attempting another tack to dissuade capital, the SNB head would also note that 2012 growth would “cool considerably”. Normally, this would weigh the franc; but he’s right. Euro fears are in control.

New Zealand Dollar Traders Look to 4Q Employment Data

The kiwi dollar is following in the wake of its Australian counterpart. And, both are at the mercy of carry interest. In fact, the Deutsche Bank Carry Harvest Index (a good representation of carry trade interest) is just off a nine-month high – and that May swing high wasn’t matched since August of 2008. We often talk of the New Zealand dollar as a significant laggard to its Australian counterpart in terms of yield. Indeed, 4.25 percent benchmark for Australia runs at a considerable to the kiwi’s equivalent 2.50 percent rate. However, there are other investments to consider when looking for relative return (especially when low risk is a factor). A prime example is the yield on 10-year government bonds, which see Australian paper yielding 3.95 percent against New Zealand rates of 3.88 percent. Nevertheless, carry may be pointing higher; but it will lack for momentum as long as risk trends themselves are lacking for drive. A possible intervening catalyst to consider is the upcoming New Zealand event risk: the 4Q employment data. Previous iterations of this report have generated modest activity, but this is an impressionable market.