Dollar Suffers Biggest Hit In 12 Weeks, EUR/USD Clears 1.3050

Though general market conditions are not conducive to maintaining trends and US equities – as a benchmark for risk appetite – have floundered, the safe haven dollar has nevertheless suffered. Through Tuesday’s close, the greenback took another impressive tumble and subsequently shifted momentum.

From the equally-weighted Dow Jones FXCM Dollar Index, technical traders would notice that the benchmark broke the floor of its rising trend channel from mid-September at the start of the week and has continued with its biggest back-to-back decline since the previous bear cycle ended. From its pairings, we can see the dollar’s struggle play out especially in its most liquid counterpart. EUR/USD has advanced for five consecutive days and is up 13 out of the past 16 trading sessions. That is a strong sign for dollar weakness from the FX market’s most liquid pair.

Though, with a seven-month high within view for the EUR/USD (at 1.3150), it is important to recall the market conditions that we are currently saddled with. First and foremost, conviction (the fundamental term for trend) is particularly difficult to develop and sustain. On the one hand, we have the natural seasonality effect we usually find through year end. On the other, we have the unnatural lack of participation (volume and open interest) that comes as a result of questionable growth, yield and financial stability forecasts.

Add to that the big-ticket and ill-defined event risk (Fiscal Cliff, Euro Crisis, Fed decision) ahead; and there is considerable resistance to developing a cross-market trend based on one of the primary market themes – most notably risk appetite trends. Tempered trading conditions have curbed the dollar, but they may also spare it.

Euro Climb Against Dollar, Swiss Franc Speaks to Serious Strength
The euro is doing exceptionally well so far this week. Since trading started back up with the return of liquidity, the currency has shown consistent gains across the board. Most impressive is its performance against the dollar (up 1.0 percent since Friday’s close), but it is the climb against the Swiss franc and British pound that truly speak to its performance. The sterling is one step away from the epicenter of euro-borne financial illness, so EUR/GBP strength is encouraging.

Yet, considering capital outflow from the region attempting to avoid economic troubles, credit crunches and tax changes is the primary source of EUR/CHF weight; its recovery stands out above all else. In this pair’s impressive 100-pip run, we see a reduction in "tail risk" for the eurozone (the probability of another crisis level development). That said, the euro’s climb has come quickly and breaks from underlying market conditions. With the ECB on Thursday (unlikely to change its stance) and the Greek aid payout decision not until next Thursday; this relief rally for the euro will likely soon sputter without an active driver to keep it going.

Australian Dollar: Is an RBA Rate Cut Reason for AUD/USD to Overtake 1.05?
Though a rate cut from the RBA yesterday didn’t carry the potential for a heavy selling wave against the aussie currency – swaps and economist forecasts already showed heavy expectations for just such a move – meeting forecasts also shouldn’t be a source of strength. The FX market’s most prominent investment currency gained ground against safe benchmark safe havens like the US dollar and Japanese yen, which could have been more a factor of underlying sentiment drive than actual Aussie dollar strength.

However, when we look at the AUDCAD’s reaction to the news, we can see how the news was interpreted. What was bullish about the event? The benchmark rate was lowered to 3.00 percent and the statement that accompanied the decision was hardly more "hawkish." Some have given credence to very modest changes to the remarks, but they won’t like pull the central bank off course (swaps show a 56 percent chance of another cut in February). Without risk, this run is in danger.

British Pound Buoyant Ahead of Osborne’s Autumn Statement
The sterling has been happy to follow in the wake of the euro – a reduced risk of regional crisis certainly carries benefit for the British currency. However, the market’s ability to ignore UK fundamentals will be put to a serious test in the upcoming session. Chancellor of the Exchequer George Osborne is scheduled to deliver his Autumn Statement, and conditions have certainly changed.

The weaker than expected economic activity and lower tax revenues put the policymaker in an uncomfortable position where he will need to prevent a deeper economic contraction while also preserving the country’s top AAA credit rating. Also worth watching is the service sector PMI for a GDP proxy.

Canadian Dollar Unmoved by Bank of Canada’s Persistent Hawkishness
We would expect a little more volatility out of the RBA decision considering they moved rates (though the market reacted the opposite of fundamental expectations). But it is still remarkable that the Bank of Canada’s persistent hawkish lean does not draw more of a contrast to its global counterparts.

The central bank announced once again that slack would eventually be worked off and Canada’s would have to remove accommodation. Yet, perhaps the market sees Governor Carney’s mid-year exit and transition a stay of execution for over 8 months.

New Zealand Dollar: Will the RBNZ Rate Reaction be as Complicated as the RBA?
Keeping the monetary policy theme of this week going, the Reserve Bank of New Zealand will look to gap yesterday RBA and BoC decision and Thursday’s ECB and BoE meets. The market is reflection little speculation of a change in policy at this particular meet and the medium-term outlook is still showing limited support for a dovish shift. That said, a lack of concern is generally the genesis for considerable market volatility. Would Governor Wheeler change his bearing with the round of bad data? It is unlikely, but if he does, the kiwi will react badly.