Dollar Has The Technicals For A Rally

In the early hours of trading Friday, it looked like the dollar’s slow climb would crumble quickly as equities regained lost ground. That sentiment boost came crashing down, however, as the day progressed and the greenback ended the quarter with its biggest rally since August 1. That said, the single day drive doesn’t override the tepid pace of recovery the currency has run over the past two weeks. Dollar bulls are in desperate need of a strong fundamental driver to jumpstart momentum and prevent another slide in the wake of passive capital flows to higher yield.

With EUR/USD just above its 200-day moving average at 1.2825 and GBP/USD leaning toward a reversal of a seven-week bull trend at the very start of next week, we will need to scan the horizon for possible fundamental ignitions. It is difficult to stir the level of sentiment needed to counteract months and years of impulsive risk investment in respect to stimulus. The Euro-area crisis and Fiscal Cliff are always good topics but ill-defined. Watch indicators like ISM manufacturing and NFPs to perhaps take advantage of a growing fear of recession.

Euro Lost Ground in All Pairs, Now for the Critical Support
It was a universal decline for the fundamental troubled and oft-speculated euro this past week. Though pairs like EUR/USD have just come off of multi-week rallies, the correction doesn’t catch many fundamental traders by surprise. The afterglow of the ECB’s Open Market Transaction program long ago wore off when investors and country heads realized that conditions for rescue from the central bank were just as burdensome as an EU-level bailout. The euro was therefore running on the good will of general sentiment, which was notably week. With the next steps in the Spanish drama played out, the market is now looking for a clear indication on whether the country asks for an official rescue or not. Meanwhile, we have the ECB meeting on deck. It is unlikely they follow up on an open-ended program, but watch Draghi’s language.

Australian Dollar to Bring Volatility Early Next Week with RBA
We have two very different reads on the Aussie dollar. Just a simple glance at AUD/USD would suggest that the high-yield currency is in a comfortable atmosphere -- not oversold nor overbought. The softer risk setting has certainly weighed the currency and the shockingly dovish outlook for the RBA decision next week doesn’t help the carry trade interest. Overnight swaps (from Credit Suisse) are still showing a 66% probability of a 25bp cut by the central bank Tuesday and over 100 bps of easing over the coming year. Though conditions are slowing and China is wavering, this still reads as too aggressive. The question is whether a hold on rates with dovish language by the central bank next week can spur a relief rally. It will likely depend on risk trends. In the meantime, net speculative interest (COT) is just off a record high. Dichotomous.

British Pound Finally Brings Strongest Run in Eight Years to a Close
It was inevitable. After seven consecutive weeks of advance (the longest climb since December 2004), GBP/USD finally closed this past period in the red. That said, the aggressive, one-sided move didn’t produce a snapback of equivalent measure. Given the scale on which we had to view the cable’s extreme advance, it is reasonable to expect that meaningful turns won’t necessarily look like a ‘V’ top. In the meantime, the average daily change for the past 20-days (a trading month) is still at its lowest levels in years (suggesting a near-term breakout). Furthermore, the COT figures revealed that speculators in the futures market have the highest exposure to a long sterling position since May 2011. The risk of a turn is high, but it doesn’t have to simply turn because it over-extended. As we look for fundamental sparks, the BoE decision stands out; yet the event has failed to generate market reaction for some time. It is better to watch general investor appetite and stay up to date on the Euro crisis.

Japanese Yen: Should Traders Expect Anything from the BoJ?
With traditional investor sentiment fading this past week, the yen responded as it always does: advancing as a carry unwind leverages its funding and safe haven status. Though not far, the yen crosses are not immediately upon their respective record lows. If there is deeper line of fear in the markets that works its way to the surface in the immediate future, there is still some volatility in a yen rally to be had. That said, a quick look at a 10-year chart of any yen cross shows where the long-term potential lies. USD/JPY (among its peers) inevitably has a long rally ahead of it. That said, we need to see some level of commitment. The only thing with any hope of offsetting the scales of risk is intervention risk. With the Finance Ministry changing hands, we’ll see if the BoJ will scale up its effort to drive the currency lower -- didn’t work well last go around.

Canadian Dollar Faces 0.9850 with Employment Data on Tap
The Canadian dollar didn’t perform very well this past week. The combination of risk aversion and a sharp decline in oil prices drove USD/CAD higher and the loonie lower against the rest of its crosses. When it comes to the establishing the fundamental health of the Canadian currency, the USD/CAD is a difficult exchange rate to gauge. As the US situation improves, so too does Canada’s. As such, it is worth browsing the crosses if you are a loonie trader. CAD/JPY is a great ‘risk’ sensitive pair and AUD/CAD balances the direct fundamentals as we head into the new week. Looking for catalysts, watch both the U.S. and Canadian jobs data on Friday for a boost in activity.