Dollar Recovers but Doubt Reigns Over EUR/USD

Confronted with a serious, technical breakdown and a rebound back within a well-formed range; the USDollar followed the easier path this past session. The hearty 0.6 percent rally for the Dow Jones FXCM Dollar Index (USDollar) no doubt has many thinking we have seen a lasting, bullish reversal for the pained currency. However, the backdrop for fundamentals and market conditions don’t support such a proactive assessment by the reserve currency. Looking to the S&P 500 as a proxy for the combined influence of traditional risk appetite and confidence founded in stimulus, the 0.4 percent dip – the biggest in four weeks – hardly turned the bulls off the scent. We need something definitive to upset the balance of moral hazard and yield chase. The improvement in the July Markit manufacturing report and 8.3 percent jump in pending home sales erodes the argument for a Taper delay, but not materially enough unite the speculative masses on a shared timeframe. The same will be true of Thursday’s initial jobless claims and durable goods numbers. While they are meaningful reads of economic activity, they do not have the clout to sway the Fed’s timetable to ease off QE3. That definitive move may not come until next week’s GDP and NFPs.

British Pound Ready for this Week’s Top Event Risk: UK 2Q GDP
The pound has made a strategic correction this past session pulling GBPUSD back following a six-day rally – the longest bull run for the pair in 15 months. A pullback is to be expected and not just because of the greenback’s rebound. In the upcoming session, sterling traders face key event risk that taps into what truly matters: economic activity and its imposition for more stimulus from the Bank of England. Through the first quarter of the year, the cable collapsed over 1,500 pips as the markets evaluated the risk of a ‘Triple Dip’ recession and assumed that the local central bank would have to play catch up to the enormous stimulus efforts made by the Fed, ECB and BoJ. Yet, those fears never came to pass. The UK avoided its third recession in this cycle and the policy group held its bearing. Yet, despite the relief the pound is still depressed.

At its current level, the GBPUSD has recovered around only a third of the ground that the pound had lost through the opening three months of the year. That speaks to engrained expectations that the currency is still facing a fundamental burden moving forward with growth and monetary policy. That leverages the importance and influence of key event risk that can clarify speculators’ outlooks. In the upcoming London session, the docket will offer the first reading of 2Q UK GDP. This indicator will tell sterling traders whether it is reasonable to continue positioning for a return to recession and a ramped up stimulus response from the Bank of England or if the currency is fundamentally undervalued. The bar has been set high for the indicator’s print as the Bloomberg consensus calls for a 0.6 percent increase for the period through June that doubles the 1Q reading. This can prove an unusually large reaction to fundamental event risk. Not only does the data represent a benchmark concern for the currency, but speculation is split between those expecting an inevitable pick up in stimulus and those seeing a stimulus-light pound.

Australian Dollar Sent on a Wild Ride After 2Q CPI, China Data Releases
After days of congestion, the Australian dollar has finally made a move this past session…but it wasn’t a push that many had expected. Looking at pairs like AUDUSD that have established a weeks-long period of congestion following a significant decline, expectations that a 0.9300 breakout was at hand were high. However, a technical break means nothing if there is an important fundamental wave contradicting the move; and that is what we saw this past session. There were two indicators on deck for the Aussie dollar. The country’s 4Q CPI update was up first, and a recent shift in expectation for the RBA to ease up from its rate cut regime set a bullish bias. The unexpected slip in the headline annual figure to 2.4 percent therefore caught the market off guard. The currency may have been able to weather the subtle miss if it weren’t for the follow up Chinese manufacturing activity report for July that printed an 11-month low.

Euro Advances as Eurozone Economy Reading Turns Positive
With the exception of EUR/USD, the euro managed a positive close against all its most liquid counterparts. Though the medium-term outlook is still troubling for the shared currency, the market was delivered short-term relief in the form of growth related economic data and another snuffed fire in Greece. From the docket, the first round Eurozone PMI activity figures for July – strong benchmark’s for the quarterly growth updates – printed unexpectedly strong numbers. Considered the best estimation for the general GDP report, the Composite figure posted expansion (anything above 50.0) for the first time since January 2012 with 50.4 print. From recession to sovereign market access, the EU announced it would delay approval of the next aid payment to Greece until Friday. Commentary was mixed, and there was some market confusion as to how this event is playing out. However, the Eurogroup noted only 1 requirement remains to be met – suggesting a high probability of approval.

New Zealand Dollar Rallies Despite RBNZ Hold, High Currency Lament
Everything else being equal, the Reserve Bank of New Zealand’s (RBNZ) suggestion that the benchmark rate will be held at a record low 2.50 percent through 2013 and that the kiwi dollar is too expansive looks dovish. Yet, the market is measuring relatives. The suggestion that the NZD is overvalued is a familiar one as it has been repeated numerous times the past months. As for holding rates through the year, that doesn’t negate an eventual hike. In fact, with a growth outlook upgrade, the market now sees a 50 percent chance of a January hike from 17 percent.

Japanese Yen Crosses Advance…But Not on Carry
There was a notable decline in the yen (rise in yen crosses) Wednesday, but it wasn’t a move on carry. How can we discern this? The highest yielding yen pairs – AUD/JPY and NZD/JPY – were down on the day while US equities closed softer on the session. Meanwhile, the June trade deficit narrowed to its smallest shortfall since June 2012 and foreign investors bought the most JGBs last week in 13 months.

Gold Drops for the First Time in 5 Days with Dollar Rebound
With the dollar positing a positive session and no flare up in global financial instability, gold was pushed back Wednesday. With the 1.7 percent drop on the day, the metal put in for its sharpest decline in over two weeks and broke a four-day rally (matching the best run for the commodity in three months). Bullish progress is difficult to maintain considering it takes a crisis of confidence in the benchmark currency or broader financial system. With the pullback it is worth noting that the CBOE Gold Volatility Index ticked 1.0 vol higher to 22.6 percent and volume was tame.