Forex: Dollar Clears Resistance with EURUSD Breakout but Fear Trade Cooling

Talking Points:

Dollar Clears Resistance with EURUSD Breakout but Fear Trade Cooling
Japanese Yen: Strong Inflation and Employment Data Doesn’t Help BoJ
US Oil Collapses 4 Percent from Highs as Syria Intervention Pressure Cools

Dollar Clears Resistance with EURUSD Breakout but Fear Trade Cooling
Having spent the past two weeks within a narrow band of congestion, the dollar finally made a move higher this past session. Yet, a trend requires much more than just a breakout to take root. And, given the recent balance in risk-sensitive capital markets along with the acclimatization to the high probability of a September Taper, the greenback already looks as if it is lacking for drive. Taking stock of the dollar’s performance, the Dow Jones FXCM Dollar Index overtook a stubborn range of resistance around 10,760. That move was derived from the EURUSD’s biggest drop since May 9 and a universal advance for the dollar against all of its major counterparts. From the docket, we can draw an anecdotal relationship between the substantial upgrade to the US 2Q GDP reading (2.5 percent from a 1.7 percent flash reading) and a greater probability for the Federal Reserve to reduce its monthly stimulus effort three weeks for now. That said, the market already seemed appreciably certain of such an outcome prior to this data. The same is true for Richmond Fed President Lacker’s (a non-voter) remark that all the conditions for the Taper had been met. If the dollar is to establish a durable and universal bull trend, we must tap an undervalued element of its backdrop – an unrivaled liquidity currency. A technical cue would be an S&P 500 drop below 1,625, but there are few clear fundamental sparks.

Japanese Yen: Strong Inflation and Employment Data Doesn’t Help BoJ
Japan’s economic docket was loaded Friday morning with event risk that represents a comprehensive view of Japan’s health and more importantly the success of the Bank of Japan’s (BoJ) stimulus effort. The list of indicators presented an impressive view of the country’s progress, but it would also undermine the central bank’s implicit effort to see its currency lower. Highlights from the data deluge were the 3.8 percent unemployment rate (the lowest in October 2008) and 0.7 percent annual inflation growth (the highest since November 2008). Strong growth and building price pressures curb the need for further stimulus. That limits the counterbalance to any carry unwind that arises.

Euro Drops as IMF Says No Third Greek Cash Injection Underway
After the Swiss franc, the euro was the weakest of the majors Thursday. There was plenty of fundamental fodder for FX traders to draw from in order to establish their positions, but the headlines would ultimately do little to the action on the day. While Germany reported an unexpected increase in unemployment, ECB member Weidmann’s call to end preferential treatment on sovereign debt and the IMF remarking that it was not laying out a new round of Greek aid; the region’s equity markets closed higher and yield lower. This was more likely EURUSD guidance.

US Oil Collapses 4 Percent from Highs as Syria Intervention Pressure CoolsUS crude prices rallied as much as 5.5 percent since the start of the week; but heading into Friday’s session, the commodity is little changed from Monday. There was a sharp reversal in the benchmark futures contract through Wednesday just after setting a more-than-two-year high above $112, and that correction was extended through Thursday. The initial swell in the market was driven by fears of Middle East instability originating in Syria. On claims that the Syrian government used chemical weapons on rebels, the United States and other Western powers have been on a path to intervene. Yet, that momentum would flag this past session and deflate the ‘fear’ bid. Particularly disarming was the UK’s House of Commons vote (285 to 272) against Britain’s support in an engagement. However, this development does not preclude the United States and others from action. Should the situation heat up again, fears of a pinch in the oil supply can easily drive prices back up.

Canadian Dollar Gains on US Growth, How Will it Do On its Own 2Q GDP Reading?
Where risk trends were neutralized, the Canadian dollar was showing gains against counterparts this past session. On the local docket, the 2Q current account deficit of C$14.6 billion was modestly smaller than expected but otherwise offered little speculative risk impact. Instead, are larger implications through the data from the country’s largest trade partner. The upgrade to the United States’ initial reading of 2Q GDP presents its neighbor with a source of stronger export demand. Another headline that drew FX trader appeal was an economist poll from Reuters which projected a Bank of Canada rate hike by the final quarter of 2014. Heading into the final 24 hours, a short-term volatility boost is possible with June and 2Q Canadian GDP figures. There isn’t a strong history of volatility, but the data can help set trend.

Emerging Markets at Risk of Another Burst of Volatility with 2Q GDP Data
Emerging market currencies from the Indian Rupee to Brazilian real stabilized this past session. Monetary policy officials in these countries are no doubt letting out a sigh of relief, but there is limited scope to count this as a certain ‘return to normal’. The trouble for the developing economies is the outflow of investor capital that is driven by a global sense of exposure to low-yielding and high-risk assets. As long as the market is looking to ‘deleverage’, this class of economy and currency will find itself under pressure. That being said, the rebound in US and European equities along with the jump in carry trade Thursday helped stabilize pairs like USDINR – more than the Reserve Bank of India’s pledge to provide dollars to its three largest oil companies. It is a delicate balance however that depends on general ‘risk trends’. Should traditional risk assets stumble, USDINR can easily be driven to 70. However, anotherasymmetrical event risk lies ahead as well: Brazilian and Indian 2Q GDP. Strong readings will be limited as the market will be distracted. A disappointment though can light another fire.

Gold Ends Bull Run Below $1,425 as Coordinated Risk Eases, Dollar Gains
Gold’s technical rally has finally come to a close. Having slipped from impressive 3.7 percent, five-day run (matching the longest series of gains in exactly 12 months), the metal is still trading above $1,400. Now the question is how far this change in tide will be. Will the move prove only as shallow as the Thursday’s 0.7 percent correction, or will the panic that drove the commodity’s 10-month collapse return to instigate the next structural bear leg? For immediate comparison to the last time we called a close to a 5-day run (April 22), the 5.8 percent advance resulted in only a single day retreat before returning to its run. The comparison between now and April are only superficial however. The previous rebound occurred after the massive 15 percent plunge below $1,500. The current series is the peak on a two-month climb. Once again, what matters are the fundamentals. Gold’s role as an alternative to traditional currencies, an inflation hedge and harbor during financial instability are all on uneven ground. With the dollar rising and market’s Syria concerns easing, the market has downgraded the metal’s two active drivers.

**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

ECONOMIC DATA

GMT

Currency

Release

Survey

Comments

1:30

AUD

Private Sector Credit (MoM) (JUL)

0.4%

Recent data out of China has pointed to a likely stabilization of growth. More indications of improvement could shed light on the outlook for Australian financial markets.

1:30

AUD

Private Sector Credit (YoY) (JUL)

3.1%

1:45

CNY

MNI Business Sentiment Indicator (AUG)