Dollar Posts Biggest Rally in 7 Months, EUR/USD Stubborn
Euro Traders Look to LTRO Repayment Commitments as Catalyst
British Pound Weakened Before Volatility-Threat 4Q GDP Report
Japanese Yen: USDJPY Posts Biggest Rally in Over Year, Near 11-Week Rally
Canadian Dollar Extends Slide Ahead of Inflation Report
Gold Forced Into Another Break, This Time to the Downside

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Dollar Posts Biggest Rally in 7 Months, EUR/USD Stubborn
This is no slow drift in underlying, fundamental correlations. We are starting to see the FX and capital markets leverage volatility in moves that defy expectations for basic risk appetite trends. The benchmark for risk appetite, the S&P 500 put in for a technical advance – though it was clearly lacking for much strength. Nevertheless, the positive close brought the measure of investor appetite and stimulus efficacy to a five-year high and secured the seventh consecutive advance – the longest series of gains since 2006. In the currency world, the yen crosses fell into the traditional lines of ‘risk on’ with the biggest rally in over a year. Yet, once again, the picture changed when you looked to the dollar.

The Dow Jones FXCM Dollar Index (ticker = USDollar) posted its biggest rally since June – a move that meaningfully extends the general bull trend since mid-September and set a six month high for the measure. From the majors, we see that this greenback strength wasn’t just the sole responsibility of USDJPY. AUDUSD led most of the other, top liquid majors with a dropped of nearly 1 percent. The notable exception was EURUSD. The pair notably advanced to the top of its two week congestion pattern (just short of 1.3400) before stalling. A bigger picture overview reveals that correlations that are normally defined by the balance between an appetite for yield and fear of loss have slackened. More than that, we find that the situation is growth more unstable with volatility and notable catalysts. An aloofness to this most elemental of themes is possible, but it grows increasingly difficult to maintain as activity levels pick up and emotions start to seep back in.

In due course, sentiment trends will inevitably realign these wayward markets and likely establish conditions that can once again provide larger trends across the FX market. Still absent, though, is the universal catalyst. The House of Representatives’ vote to extend the Debt Ceiling standoff to three months carried the weight, but proved unmoving to investors. The same is true of many of the heavily-speculated, big-ticket developments of the past weeks. Perhaps it is the intense scrutiny and thorough speculation that has disarmed these various events’ influence. If that is the case, perhaps next week’s Fed decision (disarmed by December’s stimulus move) and 4Q GDP (growth has generally taken a backseat) that will rouse action. Drawing even less attention, maybe the upcoming LTRO liquidity draw will speak to a stimulus-soaked world.

Euro Traders Look to LTRO Repayment Commitments as Catalyst
We have seen plenty of austerity on fiscal matters from the Eurozone and other regions around the world, but we haven’t seen a serious move to withdrawal stimulus on the monetary policy side. We may see a proxy for just such a move, however, in the upcoming European session. Back in December 2011 and February 2012, the European Central Bank (ECB) introduced Long-Term Refinancing Operation (LTRO) programs aimed at injecting cheap, three-year funds into the region’s banking system. After the first year, banks have the option to start early repayment of those loans should they not need the capital anymore. Those refunds begin next week, but the ECB is expected to announce how many banks, how much capital and the regional breakdown of repayments Friday morning.

Estimates for how much money will be repaid ranges from €100 and 250 billion. A sufficiently large sum can be seen as a positive sign that the region’s financial system is stabilizing and the funds aren’t needed anymore. That said, too much returned could smack of excessive optimism that could invite a return to crisis. On the other end of the spectrum, a surprisingly small amount total repayment can tell investors that banks are concerned that they are concerned of another financial crunch. The lasting assessment of health, though, comes from the regional split. The core Eurozone countries are more likely to pay off these loans while the periphery (Greece, Spain, Ireland, Portugal) banks will no doubt maintain a greater need. Should the markets respond with volatility the EURUSD’s 1.3400 to 1.3250 range could prove a victim.

British Pound Weakened Before Volatility-Threat 4Q GDP ReportThe sterling has made serious, bearish strides against key counterparts over the past weeks. In the past month the pound has plunged 2.1 percent against the dollar, 3.0 percent versus the Australian dollar and 3.6 percent when paired with the Euro. We have seen a shift towards UK-EU dissension, a shift from policy officials towards more stimulus and a fear of deteriorating growth take hold. In the final London session of the week, FX traders will be weighing in on that last concern.

After having overlooked the significant improvement in employment figures earlier this week, there is a sense that the markets are more sensitive to the negative. The economist consensus for the quarterly GDP read calls for a 0.1 percent contraction following a 0.9 percent jump. Analysts and traders have set the bar even lower – helping to explain the cable’s tumble. It is likely easier to ‘impress’ in these circumstances.

Japanese Yen: USDJPY Posts Biggest Rally in Over Year, Near 11-Week Rally
Last week, USDJPY put in for a 1.7 percent rally – its biggest since late 2011. Soon after, the pair would put in for a notable reversal. Is that a repeatable pattern, because this past session, the pair put up an even more impressive 1.9 percent rally to set fresh multi-year highs. At this point, if USDJPY closes above 90.10; we will have an unprecedented 11 consecutive week rally. Extremes cannot last without serious fundamental support. The Bank of Japan and Japanese government, however, has played its cards. One risk slide, and the yen may rally.

Canadian Dollar Extends Slide Ahead of Inflation Report
The Canadian dollar managed to regain some ground against its fellow high-yield currencies and the heavily-troubled Japanese yen. Yet, against the more stable pack, the loonie would extend its tumble. USDCAD stands out from the crowd with its move above parity (1.0000). The downgrade in hawkish language at the most recent Bank of Canada (BoC) sparked this move; so the CPI data could tout a serious impact.

Gold Forced Into Another Break, This Time to the Downside
The vote to temporarily extend the US Deficit Ceiling deadline (from mid-February to May 19) has proved encouraging for the dollar – or at least it hasn’t weighed on the safe have through risk appetite trends – and gold therefore is hit by both a stabilized fiat system and solid grounding for the world’s reserve currency. Gold’s response was a 1.1 percent drop this past session for a clean break of congestion.
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ECONOMIC DATA

GMT

Currency

Release

Survey

Comments

23:30

JPY

National Consumer Price Index (YoY)

-0.2%

In negative territory over the last 3 years

23:30

JPY

National Consumer Price Index Ex-Fresh Food (YoY)

-0.2%

-0.1%

Average of -0.4% over the last 5 years

23:30

JPY

National CPI Ex Food, Energy (YoY)

-0.5%

Range between -1.5% and 0.5% since 9/2008

JPY

Small Business Confidence

43.8

Average 45.4 over last 3 years

1:35

CNY

MNI Business Sentiment Indicator

Real GDP projected at 8.1% (YoY) in 2013