Dollar Activity Levels Suggest Serious Break, Trend Ahead

As EUR/USD holds stubbornly below 1.3000 and USD/JPY is threatening to reverse its gradual bear trend with a close above 78.50, we find that the dollar itself is tantalizingly close to posting a meaningful recovery into a strong bull phase. We can flesh out this potential on the fundamental side when we view the S&P 500’s dance with 1425 as a critical pivot point over the past months. Yet, we can see it in the reserve currency’s own technical performance with the Dow Jones FXCM Dollar Index posturing just below the upper bounds of its descending trend channel from its June 1 reversal (and the 50-day moving average).

My real interest on the technical side is in the general activity level of the benchmark. The 14-day ATR (a gauge of activity) is the lowest it has been since September 6 (a lull that preceded an aggressive move lower). A reversion to a mean in terms of volatility doesn’t imply direction. Yet, given the proximity of risk measures like US equities to major reversals, the balance of possibilities is clear. Earnings figures still have the best potential for tapping risk today. Goldman Sachs and Intel are up.

Euro Unable to Overtake 1.3000 or EUR/JPY 102.50 on Talk Alone
The 1.3000 figure looms over the EUR/USD, tempting the pair to make a move higher. This is perhaps best achieved should there be a follow up risk-positive move through the coming session; but we are unlikely to pull of such a climb on the euro’s performance alone – at least not until the end of the week.

Through the opening session, the euro was barely stirred by a rumor from FT that an Economy Ministry official suggested Spain was ready to ask for a bailout and news that Greece’s 10-year yield closed at its lowest level since August 2011. We need to see serious progress. The EU Summit on Thursday/Friday may provide. Meanwhile, today, we have a Spanish, Greek and EFSF bond auction.

British Pound: Will Inflation Figures Tip the Scales, Force Volatility?
This past week, the sterling gained against all its major counterparts with the exception of the Australian dollar (and that was due to the GBP/AUD starting off last week so high). Yet, for GBP/USD, we have seen a definitive shift in performance. Initially there was the rally from mid-July. This trend leveled out around mid-September; and since then, we have slowly retreated.

The measures of an overbought currency pair and the need for a breakout are overwhelming. The consecutive week rallies through the end of September, COT figures and SSI measures are joined by the weekly ATR reading which is at its lowest level in years. CPI data is due, but jobs data carries more weight.

New Zealand Dollar Eyes 0.8100 after Weak 3Q CPI Print
The New Zealand dollar performed quite well through Wednesday’s session, taking advantage of the risk environment and its lingering return premium to its Aussie counterpart (the NZ 10-year government bond rate is 42 bps above the aussie benchmark). However, that strength has immediately fallen away through the early hours of today’s session, and the selling pressure is proving far more aggressive than the initial opening bounce.

The sell-off early morning Tuesday stands out especially given the slow pace of activity for the rest of the markets. Such a move takes a catalyst. That spark this morning was the 3Q CPI reading which printed a 0.8 percent annual pace. This was the lowest reading since 4Q 1999. Given new RBNZ governor Wheeler’s vow to keep rates between 1 and 3 percent, we may see rate cut expectations creep in.

Australian Dollar Chinese Data Versus RBA Rate Forecasts for 1.0300
Through a two-part swing in risk trends, the Aussie dollar ended Monday higher against its counterparts. Investor sentiment naturally helped the carry currency plagued with an uncertain future. With US equity indexes posting the biggest advance in two weeks, there was a considerable compensation for other shortfalls. The most prominent struggle for the currency is its rate outlook.

Overnight swap markets are pricing in an 85 percent probability of a 25bp rate cut at the RBA’s next meeting early next month. The same product is also pricing in a cumulative 95 bps of easing over the next 12 months. That is puts a currency that is renowned for its carry in a difficult position. If rates bottom out at 2.25 percent (100 bps of easing from the current yield), it would still confer a considerable carry over funding currencies – but not enough to offset the risks involved. Meanwhile, the Chinese trade data printed a far better surplus than expected while tempered inflation suggests the PBoC may act.

Canadian Dollar Slides as Business Outlook Flatlines, Debt Increases
When we look at USD/CAD, it is difficult to discern fundamental developments from the greenback. It is exponentially more difficult to draw conclusions about the impact of Canadian data. However, we did have meaningful event risk on the country’s docket and the currency posted losses against all of its counterparts with the exception of the Japanese yen.

The weight comes largely from the economic releases for the day. It is unbecoming of a safe haven currency (a role the loonie is trying to play by avoiding recession and financial crisis while maintaining a competitive yield) when third quarter business forecast and lending figures disappointing reads. The forecast for business sales flat-lined with a net 0.0-reading – the second lowest since 2Q 2009 – versus expectations of a 13.25-print. Furthermore, the BoC reported that in the third quarter, the household debt-to-income ratio jumped to 165.8 percent. Coming up, we have the capital flow report for August.