Dollar Hits Three Week High Yet EUR/USD No Closer To 1.2800 Break

Once again, we are seeing a wide contrast between the performances of different dollar-based majors. For example, while the EUR/USD hovers weightlessly within congestion, AUD/USD extended its decline into support at 1.0175 while GBP/USD marked a long awaited break of 1.6100. For the fundamentally-weighted Dow Jones FXCM Dollar Index we find an exceptional fourth day to its persistent advance that draws an unusually similar to the S&P 500’s four-day climb. Yet one is a safe haven while the other is a favorite for yield return.

How can two so essentially different players on the risk scale show a consistent trend in the same direction? Negate risk trends as a driver. If we look at the pace of both equity index and currency, both are lacking for progress. Risk trends themselves have been placed on ice, allowing correlations like these to warp.

It is difficult to benchmark a particular catalyst that we have on our docket, but the lead in to the NFPs on Friday can certainly dissuade unconvincing moves. Meanwhile, the Fed minutes are due this session, though there is likely little to add to last month.

Euro’s Universal Advance Continues, Is there Expectations of ECB?
The euro managed to third consecutive rally against nearly all of its counterparts through Wednesday. This drive is remarkable not just for its consistency but moreso for the fact that it is so broadly based. An easing of fear that capital markets are on the verge of collapse takes the burden off the fundamentally-questionable future of the euro.

That is particularly fortuitous timing for the shared currency given recent headlines that report Spain’s Prime Minister is not on the verge of asking for a full bailout while Greece’s Finance Minister worries a deal with the Troika may not be possible before the EU Summit (made even more concerning by a local news agency warning growth projections top a 5 percent decline in 2013). If risk trends return, the euro will be unable to escape its gravity. In the meantime, the upcoming ECB decision may offer its own influence. Is this advance reflective of a follow up to last month’s OMT? If so, there will most likely be a disappointed crowd.

British Pound: Can the BoE Stall, Accelerate GBP/USD Break?
Like EUR/USD and AUD/USD, the cable is a pair that quickly falls into line with broader risk trends. Yet, what are to make of GBP/USD’s drop below 1.6100 when the benchmarks for measuring risk have refused to commit to a clear decline? On the tail of a seven-week advance (last week was a congestion/transition period), there is a speculative sense that this pair is overbought.

The deterioration in data that plays into fears that UK budget balancing is cutting into growth, but it would be a stretch to suggest this can stand as a catalyst of its own. The upcoming BoE decision is equally lacking for influence as changes can’t even spur substantive moves. GBP/USD is still overextended, but risk trends are key.

Australian Dollar Takes a Breather Versus Fellow Carry Currencies
The Australian dollar has stood out as the biggest mover amongst the majors so far this week, but the post-RBA rate cut wave seems to have finally let up this past session. Both AUD/NZD and AUD/CAD have seen a substantial bounce from their initial selloffs.

In contrast, AUD/USD extended its own decline. That is interesting considering risk trends were generally bearing higher. If it were a consistency of rate cut concerns for the RBA, we would see the Aussie weaken against comparable investment currencies as well. We are at that point where risk trends need to take over for the more yield-heavy pairs. Beware of tentative breaks on AUD/USD and AUD/JPY that aren’t accompanied by a selloff in equities.

Japanese Yen Eyes 79 but Yen Selling Difficult to Sustain
For those that have been watching USD/JPY’s rise, the pair is now working on its fifth consecutive advance with an early Asia session climb. What carries a pair that is made of two safe havens with sizable debt issues? Risk trends don’t show through in the standard way, but a market-wide unwinding of the yen certainly bolsters the case for a bullish USD/JPY.

Something to add a fundamental slant to the yen’s weakness with this pair this morning, we learned from the Ministry of Finance that Japanese investors bought a net 1.542 trillion yen worth of foreign bonds this past week. That is the biggest outflow of capital through foreign bond purchases since August 2010. It is difficult to connect the current week’s move to last week’s capital flows, but that is the kind of formula officials will have to consider for the upcoming BoJ rate decision (Friday morning). Do they have the will and ability to feed sizable outflows of capital and thereby convince the market of its commitment?