Dollar Advances Despite Risk Aversion, Sign Of 1.2920 Break Soon?

Despite a sharp rally from US equities (the S&P 500 briefly overtook 1450 and still managed a 0.3 percent higher on the day), the US dollar found its way to an overall advance on the day. The Dow Jones FXCM Dollar Index squeaked out a 0.1 percent climb Monday – the five bullish close for the benchmark in the past six trading days.

There are two ways to read the fundamental contradiction of the FX market’s preferred safe haven rising at the same time the standard benchmark for risk trends show progress. Either the individual currency is exhibiting exceptional, underlying strength or the fundamental conviction behind the investor sentiment swell was flimsy. Depending on the answer, the dollar’s slow climb will finally collapse or this may have been a failed last ditch effort to reignite risk appetite.

Taking a closer look at the dollar’s performance on the open day of the week/month/quarter, we see that the greenback rose against a mixed bag of high yield and fellow safe havens (NZD, GBP, AUD, JPY) and fell against a similar mix (EUR, CAD, CHF). In this, it would be a stretch to base performance on the single currency itself. So instead, we throw the spotlight on the underlying sentiment drive for the day.

The US equity benchmarks’ (favorite risk plays given their correlation to stimulus efforts) inability to capitalize on their technical breaks immediately casts doubt on conviction. Tepid volume behind the same market (especially on the open of a new quarter) further undermines momentum.

What would we expect to act as fuel for a risk rally fire? There were a few headlines for the global markets Monday, but the standout update specifically supportive of risk appetite would have to be the ISM manufacturing survey for September. The 1.9 point increase (the biggest since January 2011) unexpectedly lifted the manufacturing sector into expansionary territory (51.5 is above the 50.0 threshold) and may offer some holdouts a degree of hope for US growth against the global tide of a slowdown.

It is difficult to maintain that optimism when we recognize that Chinese, eurozone, Japanese and Australian activity indicators are all pointing in the opposite direction. Against the heft of a worldwide cooling, this single indicator simply cannot carry the markets. Neither could Bernanke’s vow to keep stimulus in place even if the economy improves…

Australian Dollar Slides after RBA Cuts Rates, Will We Hit 1.2000?
The RBA surprised half of the market by cutting its case rate to 3.25 percent. And, that is certainly enough of an upset to force repositioning and volatility. Heading into the Australian central bank’s rate decision, overnight index swaps from Credit Suisse were pricing in approximately a 65 percent chance of a 25 basis point cut by the policy authority.

From a speculative perspective, this was perhaps even more a far-fetched outcome given the RBA’s four-month hiatus from the rate cut game. Economists certainly added to the resistance with 19 of 28 forecasts submitted to Bloomberg calling for a hold at 3.50 percent. That sets up the market’s bearings heading into the release.

With the cut, the there has been clear readjustment (speculative bulls unwinding their long carry trade position and ambitious shorts adding into the declines). The immediate reaction was far from "extreme," but it was consistent. Follow through beyond the initial move largely depends on the specific pair’s dependency on risk trends and the drive behind risk appetite itself.

For a pair like AUD/USD, should the winds behind underlying risk trends build; the pair will simply fall in line. However, for a pair like AUD/NZD or AUD/CAD, there is less of a dependency on a complimentary sentiment push. That means the 12-month low on the former and move towards parity for the latter carry more weight.

Euro: Spain Rumors Can’t Leverage EUR/USD or EUR/JPY Bull Trend
The euro showed some traction this past session, but should we take this as a sign of a lasting recovery? The currency’s own fundamental encouragement likely supported risk trends itself. Outside of the record high unemployment reading and final manufacturing PMI readings, the top headlines were more dynamic and deeply rooted.

Once again, the top of conversation was Greece and Spain. A draft budget for the former hit the wires with a downgraded growth forecast (0.0% 2013 GDP forecasted back in March to more realistic 3.8 percent drop). For Spain, a Reuters rumor that the country was close to asking for a bailout was checked by a downgrade to the deficit figures…so soon after their budget.

British Pound Anchored to 1.6100 Against Dollar After Poor Data Showing
While the EUR/USD made its move higher Monday, GBP/USD was anchored to 1.6100. This is partly a reflection of the uneven fundamental drive behind all risk-sensitive markets, but this weakenss also speaks to the sterling’s own struggles. The drop in factory activity and the biggest drop in net mortgage lending since December 2010 make the threat of an extended UK recession a real possibility. Keep watch on GBP/USD.

Japanese Yen: No Sudden USD/JPY Rally towards 80 with New Ministers’ Warnings
As expected, Japanese Prime Minister Noda shuffled his cabinet this past weekend in an attempt to fortify his position before a possible election. The new Finance and Economy Ministers didn’t waste any time to lament the high level of the yen and its negative impact on the economy. The latter would also take up the call to push the BoJ towards foreign bond purchases. Will the central bank heed?

Swiss Franc Seems to be Testing a New Ceiling on EUR/CHF at 1.2080
It was less than a month ago that EUR/CHF finally advanced off its SNB-imposed 1.2000 floor and held off of the skirmish line. Recently, however, it seems that the pair has once again taken to developing a magnetism to a consistent floor. This time, the foundation seems to be set at 1.2080. And, if risk aversion or euro-area crisis concerns pick up, there is no central bank acting to hold up this level…