Dollar Primed For Breakout After EUR/USD Retreats From 1.3400

The dollar has put in for a few particularly interesting moves over the past 24 hours. Yesterday, the greenback extended its advance against the euro to more permanently shift EUR/USD off multi-month highs at 1.3400, while GBP/USD closed below 1.6000 for the first time in eight weeks. This morning, a few of the more risk-sensitive currencies followed through on a firming dollar trend. Most notable is AUD/USD which is currently experiencing its steepest slide since December 21. The cumulative effect of these favorable moves amongst its major pairings, however, does not provide much encouragement to seriously drive the dollar to a bullish trend. In fact, if we look at the equally-weighted Dow Jones FXCM Dollar Index (USDollar), we find the currency has barely moved over the past four trading days. In fact, the US dollar has carved out one of the smallest average trading ranges over the past week that we have seen going back to when ‘high’ and ‘low’ data have been collected.

Taking the temperature of the broader market, we find that the dollar’s lack of progress aligns it to the general pace of the speculative markets. Despite the fact that it is trading at a five-year high, the S&P 500 (a benchmark for risk appetite) has seem follow through completely collapse with a five-day average range (ATR) at its lowest point since August 20 (and before that it was December 31, 2010). At the same time, the capital market’s favorite measure of ‘fear’ – the VIX Index – continues to tread five year lows. Risk exposure has scaled considerable heights, but the rush of sidelined capital that so many expected to follow the Fiscal Cliff resolution doesn’t seem to have caught.

This incredible level of inactivity, though, cannot last. Turnover – whether for speculative means or necessary repositioning of capital – must return. We know that the safe haven dollar will move in the opposite direction of risk trends, so the real questions are what can spark the sentiment shift and when will it occur. In the upcoming session we have another round of earnings reports (Bank of America and Citigroup), but we seem to have our measure of skeptical disregard in place. A far more promising (threatening?) market mover is the Chinese 4Q GDP reading (more on that below). And, of course, we can keep a watchful eye on the combination of debt ceiling and stimulus regime end speculation. Yet, unless there is something tangible on these fronts, it may be difficult for the mainstream investment community to commit to any forecasts.

Australian Dollar Tumbles from 1.0600 Ahead of Chinese GDP
The Australian dollar was playing aloof through Wednesday’s trading session. For AUDUSD, the aimless Aussie dollar managed to nudge close to the closely-monitored 1.0600-level, but there was obviously little conviction behind the 7-pip advance. In a market that a struggling for a speculative ‘risk off’ or ‘risk on’ bias, you can still see the Aussie dollar climb through the buildup of higher yielding currencies. The fact that this natural pressure was absent is a sign that risk trends are engaged – they are just flat-lined. We started to see some sign of life, however, this morning when AUDUSD dropped just over 75 pips. We can attribute the pick up to the disappointing Australian employment data, but much of the follow through came well enough after the news was absorbed. Far more promising for finding volatility that translates into a potential trend is the upcoming Chinese 4Q GDP release (industrial production, investment, retail sales and property prices are also due for release, but not as influential). China carries the badge of the largest global player still providing serious growth and yield, so it is certainly a catalyst for risk trends. Though for the Aussie dollar specifically, we should also remember that this powerhouse also buys most of Australia’s natural exports.

Euro Finds No Strength in Bailout Countries’ Optimism
After stumbling on comments made by Eurogroup Chairman Juncker that the euro exchange rate was ‘dangerously high’ (an event that seems to have revived the Currency Wars conversation), the euro has found little reprieve from a series of self-supportive evaluations of market and economic health. On the newswires: the IMF evaluation was good enough to release Greece’s next €3.24 billion in aid; Spain’s Treasury chief said the country didn’t need a bailout as confidence had recovered; the ECB’s Nowotny said there was no immediate problem with the euro level; and Portugal drew strong demand and low yields for a short-term bond sale. The markets are shrugging off the banal, looking for the meat.

Japanese Yen Rally Hindered by BoJ Meeting Next Week
Another day of decline for the benchmark USD/JPY (and other yen crosses), and another day where the pair has bounced significantly off its low into the close. There is a siren call of a natural correction (to book profit and speculate on a disappointing turn for stimulus reaction), but the countdown to the BoJ’s rate decision next week keeps the market frozen. If risk aversion kicks in, we will move lower. Otherwise, chop remains.

New Zealand Dollar Traders Await 4Q CPI Data
The New Zealand dollar (kiwi) seemed to follow the lead of the Aussie dollar this morning – offering further evidence that it wasn’t the Aussie’s own fundamentals that were encouraging it forward, rather something broader like risk trends. The kiwi will general follow the guidance of risk trends moving forward. However, we may seem some sort of diversion from the upcoming 4Q CPI data – especially with AUD/NZD, NZD/CAD.

British Pound: Watch GBP/USD, EUR/GBP as UK Talks EU Exit
Concern is starting to build about a possible, systemic change in the British pound’s position and appeal in the broader market. UK Prime Minister Cameron’s dispute with European Union authorities over budget initiatives and capital flows has many fearing that a referendum of negotiation-or-EU-exit is in the works. The Business Secretary is set to speak this morning, but Cameron’s speech on Friday is the big ticket.