Dollar Extends Rebound, Loses Momentum Before Key Breakouts

The Dow Jones FXCM Dollar Index extended its rebound Thursday, but it would lose its drive before the greenback could secure breakouts on pairs like EUR/USD and USD/JPY. Nevertheless, the benchmark’s performance on the day is impressive against the backdrop of swell in risk appetite. Looking to the US equity markets, the battered S&P 500 muscled a 0.9 percent rally – the biggest run in three weeks – to close just below its 50-day moving average and the range of highs established throughout the week. Investor sentiment is less bullish than it is congestive, and that lack of conviction carries over to the safe haven dollar. Sentiment is thereby neither a benefactor nor burden. Yet, as much potential as the ebb and flow of risk positioning has on capital flows and the dollar, there are a few other fundamental themes that the currency can revert to when left to its own devices. The second most influential driver for the dollar is the market’s view of the Fed’s Taper timetable. Following up on the FOMC minutes’ revelation that the group broadly supported the schedule Bernanke laid out in June, the New York Fed released the results of its primary dealer survey. According to the consensus, the major banks charged with dealing Treasuries expect a September Taper of $15 billion – more than economists expected. Further, the group projected a further $15 billion cut in December and halt by June.

Japanese Yen Crosses Surge Higher with USD/JPY, EUR/JPY Boundaries at Hand
Though the Deutsche Bank carry trade index fell for a fourth day, the yen crosses put in for an across-the-board rally. The only Japanese-based event risk to absorb was Japanese investors’ ¥904 billion in net sale of foreign bonds through the week ending August 16 – in other words a repatriation of capital following the biggest outflow in three years reported the previous period. That said, it is worth noting a growing deviation between the key yen pairs and the Nikkei 225. The relationship has proven exceptionally strong over the past few months, which could anchor one party or accelerate the other. With key technical levels ahead for USD/JPY, EUR/JPY and GBP/JPY; this is a relationship to watch.

Euro Attempts Fundamental Rally on Strong Data, Success Uneven
The euro finished the day higher against all but one of its counterparts Thursday, but there was limited strength to the move. With the calendar offering up significant growth updates in ‘advanced’ August PMI figures, there was something tangible for euro traders to anchor their positioning to. France was the first country to report with an unexpected contraction (reading below 50.0) in the service sector and weaker manufacturing reading – though both advanced from the previous month. Ever the guide of the region, though, Germany’s statistics bested forecasts and the Eurozone Composite posted a better than expected 51.7 – the highest reading since June 2011. While encouraging for the long recovery, such data falls well below the threshold for driving the euro. The same is no doubt true for the upcoming German 2Q GDP revisions.

Canadian Dollar Drops after Poor Retail Sales Data, Inflation Numbers Ahead
Though it didn’t engender a full scale trend for the Canadian dollar, the retail sales data from this past session did leverage an already weak hand with USD/CAD. The pair extended its climb to a fifth day and 2.0 percent. Looking at the economic data, consumption in the country through June reportedly dropped 0.6 percent – more than expected and the second sharpest monthly drop in two years. Excluding auto sales, the drop was 0.8 percent. The slide is being partially attributable to a construction strike in Quebec and flooding in Alberta, but the net impact on next week’s June and 2Q GDP figure will nevertheless reflect this disappointing turn. For Friday’s session, the data will lean more distinctly towards monetary policy. The headline July CPI figure is expected to pick up to a 1.4 percent pace – below target but a yearly high.

British Pound: Will the 2Q GDP Update Catch the Market’s Attention?
UK markets were more staid then their main-land Europe counterparts Thursday. The 10-year gilt yield passed the session little changed while the FTSE 100’s 0.9 percent advance was measurably tamer than the DAX, CAC40 and Euro Stoxx indexes. Given the empty news ticker and economic docket, the sterling had to fall back on its passive effort to recover the ground lost through the opening months of the year due to recession and QE speculation. However, BoE member Martin Weale’s remarks Wednesday that a QE-based program was still an option seems to have curbed that automatic drive. Looking ahead, sterling traders have the second reading of 2Q GDP numbers. Most of the short-term market impact comes from the first (advanced) readings. Yet, the details can offer a better view of trends.

Emerging Markets Currencies Slow Descent but Recovery Elusive
The Brazilian real and other BRICS currencies closed posted intraday recoveries Thursday and a few actually closed higher against the safe haven US dollar. Yet, the heavy bear trend for this group reflects a segment that is not yet confirmed for a lasting recovery effort. Looking to the global capital market flows, the MSCI emerging markets ETF hosted its first advance (1.6 percent) in six trading days while Bloomberg’s Emerging Market Sovereign Bond Index extended its tumble to an eighth consecutive day. Those awaiting a change in momentum, the first place to look is the US Treasury and equity markets. As stocks in the world’s largest economy rise, it is an early sign of risk appetite though there is a different level of liquidity versus developing markets. Treasuries assess the carry unwind.

Gold Ignores Dollar and Holds Range, Silver Ratio Heading Lower
The dollar was put through its rounds this past session and US equities pulled up for a substantial advance on the day. However, neither the gauge of fiat reserve demand nor the measure of capital market turnover put forward meaningful breakout or trend moves. That would leave gold in a similar lurch. The precious metal rose 0.7 percent which kept the week-long, $25-range below $1,380 intact. For the speculative recovery effort, we have yet to see volume significantly recover and fund holdings of the commodity have merely leveled. Meanwhile, the fundamental burden of acting as the alternative to the world’s most prominent safe haven – the US dollar – was once again working against gold. The NY Fed’s primary dealers survey further reinforces expectations of the September Taper and gives the pace thereafter. Draining the system of cheap dollars diminishes the need for an alternative. For a metals comparison, the gold-silver ratio fell for the first time in three days Thursday. The rebound that began Monday – following a two-week, 12.3 percent plunge in the ratio – may already be over.