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US Dollar Clears Fed Threat, Ready to Run if Fear Erupts

By , Chief Currency Strategist
23 June 2012 02:46 GMT
  • Dollar Recovers More than Half of its June Losses, Ready for Risk
  • Euro: Can the EU Summit Curb Speculative Interests Like the Fed Decision?
  • British Pound Traders Need to Weigh the Potential Of Crisis Spread Against QE
  • Australian Dollar Sees a Sharp Drop in Speculative Positioning with COT Data
  • Canadian Dollar Seeing its Buffer to Risk Trends Fading
  • Swiss Franc Keeps a Wary Eye on the EU’s Stimulus Decisions
  • Gold Back at its Critical Support as Central Bank Balance Sheets Lose Momentum

Dollar Recovers More than Half of its June Losses, Ready for Risk

Through the opening 14 days of June, the Dow Jones FXCM Dollar Index dropped nearly 285 points despite a deteriorating global fundamental backdrop that would normally bolster safe havens. Yet, it is a testament to where sentiment truly lies that the greenback regained half of the ground lost over that near three-week period with a single rally. There was a break on risk appetite trends these past few weeks that helped skew the markets to be more reactive to positive risk-based developments and discount the negative: the possibility that the Fed would delivery another mass stimulus infusion. With the concern that the central bank was going to devalue the currency and indulge short-term speculative appetite passed, the dollar is now free to move.

That said, removing a fundamental restraint is not the same thing as applying an active catalyst. There have been plenty of negative developments over the past two weeks that were overlooked under the belief that the central bank would neutralize their ill-effects. It would stand to reason then that the market has some adjustment to do to match price with fundamental value. Unfortunately, a speculatively-directed market does not fit into such a tidy picture. There will be a natural bearish bias tugging on risk trends and nudging the greenback forward because of the events of the past few weeks as well as the general course of growth and yield expectations. However, the markets are still dazed and sluggish in the wake of such a dramatic shift in the outlook. What we need is an active catalyst to decide our next trend.

Moving forward, there is plenty of data on the economic docket; but few of these releases will truly exploit the underlying concerns of global investors. Perhaps one of the few things on the tape ahead that can alter the current of sentiment is the EU Summit. As reality that the Greek election and open-ended promise of a Spanish bank rescue doesn’t proactively curb the region’s crisis sets in, traders will be expecting something sweeping from struggling policy group to finally change the course of the world’s largest collective economy. This may end up have the same influence as the Fed rate decision – dampening efforts to take large trades on the chance that something substantial is offered.

Euro: Can the EU Summit Curb Speculative Interests Like the Fed Decision?

This past week was a tremendous disappointment for the Euro’s fundamental health. Weak data and painful bond auctions were punctuated by continued infighting about how to resolve the region’s deteriorating financial health. The risks were clearly defined by policy officials actions (and lack thereof) this past week. The EU finance ministers’ two-day meeting came to the same impasse on Greece’s plea for more accommodation and Spain’s rescue fund as the meeting between German, French, Italian and Spanish leaders Friday. It used to be that a lack of agreement wouldn’t dissuade policy officials from their optimistic interpretations of the future, but now even the region’s cheerleaders are starting to spout threats. Italian Prime Minister Monti warned that there was only a week to stabilize the Euro-area while the IMF released a report that said the group was at a ‘critical stage’ where questions about the viability of the common currency were being raised. This speaks to high risk and a lack of progress amongst policy makes moving into next week’s critical EU Summit. The market will look to see whether Greece can renegotiate its bailout terms and Spain receive a bigger stimulus program than the lowball estimates suggest is needed. That is the bare minimum for what is needed to stabilize. To genuine encourage recovery speculation, we need something along the line of common bonds or regional guarantees.

British Pound Traders Need to Weigh the Potential Of Crisis Spread Against QE

Rate forecasts and the 10-year Gilt yield haven’t really reflected the impact of the renewed wave monetary policy easing this past week. With rates already exceptionally low and the distraction of whether the Euro Zone crisis will spread to the UK as so many policy officials have taken to warning, sterling traders have been distracted. That said, as the BoE balance sheet grows, the negative implications to its long-term carry currency position will weigh in. The 5-4 vote at the last BoE decision and the active liquidity program are very real weights on the pound.

Australian Dollar Sees a Sharp Drop in Speculative Positioning with COT Data

Between the rebound in risk appetite trends and easing in expectations for aggressive rate cuts, the Australian dollar has stepped up as one of the strongest currencies amongst the majors. That particular move is further reflected in speculative positioning, with the COT’s net speculative positioning amongst Aussie dollar futures traders showing the biggest jump on record (42,000 contracts) – though this comes just after the market was the most net short on the currency contract on record. That said, do we expect carry appetite or rate hikes to return soon?

Canadian Dollar Seeing its Buffer to Risk Trends Fading

The Canadian dollar has been able to curb its sensitivity to risk appetite trends – in contrast to its Australian and New Zealand counterparts. It has been able to accomplish this by its direct connection to the US dollar but also as the only investment currency to maintain a positive bearing on interest rate expectations. That said, Friday delivers a considerable blow to this unusually divergent bearing as May CPI dropped more sharply than expected to a 1.2 percent annual pace. Will next week’s April GDP reading further blur the picture?

Swiss Franc Keeps a Wary Eye on the EU’s Stimulus Decisions

The Swiss franc continues to trade just off the radar. Against most crosses, the currency resembles the euro rather than a traditional safe haven. This is a nuance that comes thanks to the SNB’s efforts to hold the line on EURCHF. This remains one of the most contentious issues in the FX market. Should the EU Summit not offer relief, fear could redouble the pressure on the 1.2000 EURCHF floor – forcing action from the SNB.

Gold Back at its Critical Support as Central Bank Balance Sheets Lose Momentum

Gold didn’t make much progress in the risk-positive lean of the opening weeks of June – not surprising given the commodities position as a general safe haven. That said, with the subsequent risk aversion drive that leveraged the dollar after the Fed rate decision ended without fresh balance sheet measures, the metal certainly did dive. Once again, we are within arm’s reach of a floor that goes back to July.

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ECONOMIC DATA

Next 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

06:00

EUR

EUR German GfK Consumer Confidence Survey

5.70

Likely down on

Euro-Zone Crisis.

12:30

USD

USD Chicago Fed Nat Activity Index

0.11

14:00

USD

USD New Home Sales

345K

343K

The weak June MBA Mortgage Applications data may indicate weaker sales.

14:00

USD

USD New Home Sales (MoM)

0.60%

3.30%

14:30

USD

USD Dallas Fed Manufacturing Activity

-5.10

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23 June 2012 02:46 GMT