Dollar Gains Against Euro Will Stall If Dow, AUD/USD Don’t Collapse

If we boil the dollar down to a simple gain or loss, the greenback’s performance Monday was impressive. The benchmark managed gains against all but fellow safe haven Japanese yen through the opening session. Yet, we need look beyond the simple gain or loss and look at the quality of the session’s performance. The progress the greenback made was exceptionally reserved.

The lack of progress is well-reflected with the Dow FXCM Dollar Index which advanced a sparse 9 points. For those keeping score, the Index hasn’t posted a move more than 30 points (bullish or bearish) in six active trading days. In other words, the dollar is trading in a tight congestion.

The lack of bearing and conviction is more than obvious amongst the majors. EUR/USD’s otherwise important break below 1.3000 has generated little speculative drive to towards deeper, bearish objectives. The dollar’s other, top leverage position through AUD/USD has similarly lacked for progress. The disconnect from trend traces back to ever-volatile risk trends. Two of my favored risk barometers - the Dow Jones Industrial Average and S&P 500 - continue to carve out tight ranges (150 and 25 points respectively).

What makes this congestion exceptionally unpredictable and potentially volatile is that it is setting up at multi-year highs. A basic fundamental expectation in the wake of the Fed’s new stimulus program would be a strong, bullish advance for equities and hearty decline for the dollar. Yet, speculation seems to have already projected further support and complicated the situation.

Seeking out those viable (and known) catalysts for underlying risk trends has become the primary objective for those awaiting a swing or trend from the dollar. The problem this week is that there are few scheduled events or indicators that carry the necessary influence to stir such a deep current. This past session, the top event risk was the Chicago Fed’s national activity index for August which posted the deepest read of contraction (-0.87) since June 2009.

Perhaps if this indicator carried a little more influence, it would add to the bigger picture view that global growth is stalling. Yet, with stimulus reminders like St. Louis Fed President Williams’ suggestion that the QE3 program will carry into 2013 and could involve other assets; it is easier to stand pat than commit to a serious shift from the passive consensus.

In the upcoming session, we will see whether the September Consumer Confidence survey has greater sway over the dollar or sentiment trends. FX traders looking for volatility should hope for the latter. Looking beyond the near-term and known event risk, we should remember that backdrop for risk-reward is extremely skewed.

Levels of return show aggregate benchmark yields amongst the majors just above record lows while the real rates of return (inflation-adjusted) for the benchmark 10-year Treasury is negative. The only reason this the market invests in such anemic conditions is volatility is at five-year lows – thanks to stimulus vows. What happens if confidence in the global safety net recedes?

Euro Jostled by Rumors of Bailout Leverage and Greece Crisis
Both scheduled event risk and rumor was having its way with the Euro Monday. With the exception of EUR/NZD (which was throttled by stand out weakness for the kiwi), the euro suffered a uniform decline on the opening day of the week. From the Docket, the German business confidence index (IFO) showed an overall reading for September that was a two-and-a-half year low. As the largest member of the Eurozone, trouble for this country’s business sector is an issue for the entire region. That short-term catalyst aside, the more pressing issue was development in the ever-present Euro-area crisis.

German magazine Der Spiegel was the source of two contradictory (in terms of euro influence) rumors: that the ESM could use leverage to boost its influence to €2 trillion and that Greece’s deficit through August was actually €20 billion euros. Both were rebuffed by officials, but these are valuable for measuring market sensitivity to conjecture. We need a real catalyst.

Japanese Yen: Pension Funds May Do What Azumi is Hesitant To
Japanese Finance Minister Azumi was on the wires this morning attempting to leverage previous action through jawboning. In reference to the failed impact by the BoJ to drive the yenlower through an increase stimulus program, Azumi said the policies would have an impact over the mid- to long-term. Meanwhile, weekend headlines report a Japanese teachers fund is looking invest 50 billion yen in foreign bonds…

Australian Dollar Traders Unimpressed by RBA’s Reassurances, China in Focus
The RBA released its Financial Stability Review to little fanfare this morning. Reflections that domestic growth is robust enough to weather shocks from the Eurozone and China slowdown are reiterations of assessments we have heard before. Meanwhile, rate expectations are showing doubt in this rosy outlook (12-month RBA forecast sees 96bps in cuts) and a "Chinese Beige Book" confirms slowdown.

British Pound: GBPUSD Shows Extremes on Multiple Levels
The GBP/USD’s seven consecutive week bullish advance (the longest run we’ve had for the cable since late 2004) was something we highlighted last week. Extreme moves often signal turning points but a measure on a weekly chart will be less distinct. Perhaps another extreme measure to consider: the 20-day (standard trading month) average daily change for the same pair is the smallest we’ve seen in over five years.

New Zealand Dollar Top Mover on the Day, Losses Beyond Obvious Data
The New Zealand dollar was by far the biggest mover on the day Monday with a sharp decline across the board. Against the individually weak Euro, the kiwi would still outpace with a decline of 0.4 percent. Meanwhile, the risk aversion leveraged Japanese yen gained a hearty 1.2 percent against the commodity currency. This shift seems more speculative flow-based than data / event risk derived given the amplitude.