Euro: A True EUR/USD Turn as ECBs Draghi Hints at Intervention?

Dollar Rallies to Close at 2 Year High as Risk Slips
Euro: A True EURUSD Turn as ECB’s Draghi Hints at Intervention?
British Pound Rallies as BoE Easing Expectations Prove Unfounded
Japanese Yen: Risk Trends Putting Pressure on Japanese Officials
Canadian Dollar Traders Prepare for Jobs Data, Volatility
Australian Dollar Takes Another Hit as RBA Lowers Growth Forecast
Gold Unimpressed by ECB Tone, Drops to Support

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Dollar Rallies to Close at 2 Year High as Risk Slips
A trace of dovishness from the ECB and an early session dive in capital markets drove the US dollar materially higher Thursday. Putting aside the greenback’s extended performance against counterparts like the Australian dollar, we garner a far better picture of the benchmark’s more recent strength when we look to the more mainstream pairings. Most notable is the world’s most liquid currency pair – EURUSD – which had deviated from the broader performance of the dollar since mid-December. Since topping at the end of last week, though, both EURUSD and the Dow Jones FXCM Dollar Index (ticker = USDollar) have slowly begun to realign. And, with the additional support of this particularly important pair, we have seen the USDollar overtake 2012’s high and close at its highest level since November 30, 2010.

As is the case in the Forex market, much of the dollar’s strength is derived from the relative weakness of its counterparts rather than a serious strengthening of its own accord. The fundamental depreciation the greenback experienced against the Euro has proven its greatest hurdle. From the reduced tail risk of a Eurozone crisis, the currency’s recovery (and consequential subverting of the dollar) shifted to the realization that the European Central bank (ECB) was actually reducing its balance sheet through regional banks’ early repayment of the Long-Term Refinancing Operation (LTRO) program. That is a dramatic contrast to the Fed’s persistent $85-billion-per-month purchases. On that point, Chicago Fed President Charles Evans – amongst the most committed dove – said the stimulus purchases could potentially continue for over a year. However, his allowance that the program can be capped before the jobless rate hit 7 percent was still seen as a moderating of the Fed’s dovish extremes.

Pulling the EURUSD into the fold with the rest of the majors resolves a serious complication to the fundamental backdrop and can offer the dollar additional strength. Yet, bullish momentum for the dollar will continue to find some measure of restraint unless the most primal of fundamental drivers throws in its weight: risk trends. There are plenty of early signs of souring sentiment, but full-blown risk aversion (where the dollar’s safe haven status really stands out) won’t be fully convincing until stimulus-supported US equities and yen crosses reverse.

Euro: A True Turn as ECB’s Draghi Hints at Intervention?
The euro took a dive against all of its major counterparts this past trading session. Progress behind the shared currency’s decline has brought us to the point where we have to wonder whether we’ve seen a permanent shift to bear trend. As discussed above, the most remarkable turn comes via the EURUSD’s 2.3 percent drop from 14-month highs set last Friday. Given the stubbornness of sentiment and the blatant improvement in relative, central bank balance sheets; a turn from this particular pair carries significant fundamental weight for the euro.

So, where does this possible break in euro bullishness come from? Key was this past sessions, ECB policy meeting. At first glance, the group didn’t cut rates, adopt a new stimulus program or move to offset the LTRO liquidity drain. That said, President Draghi did hint – to a highly sensitive market – that conditions could warrant an easing effort in the future. Along with reiterating a weak growth forecast, the central banker remarked that the policy authority would monitor the euro’s level for its contributions to inflation risk. There is little action behind this threat as of yet, but traders recognize that the ECB has room to cut the benchmark rate – an easier move than adopting new stimulus measures.

In other news, a significant burden for Ireland – a bailout member – was lifted when the ECB approved a swap of promissory notes to longer-term (30-year) government bonds. That will reduce the total costs of its rescue; but note their declaration that this was a one-off. Sure…

British Pound Rallies as BoE Easing Expectations Prove UnfoundedThe sterling played out exactly the opposite performance that the euro had this past session. A market-wide advance was derived from unrealized speculation. Heading into the Bank of England’s policy meeting, there was a growing belief amongst bears that the policy body would upgrade its policy efforts to bring it more inline with the accommodative BoJ or Fed. Instead, the group was mum aside from a statement that maturating gilts would be reinvested. Another big sterling booster was future Governor Carney’s suggestion that current policy may be enough.

Japanese Yen: Risk Trends Putting Pressure on Japanese Officials
This isn’t what Japanese policy officials want to see. The yen advanced against all of its major counterparts with the exception of the British pound this past session. The concerted and consistent effort by the government and central bank to devalue their currency has been awe-inspiring. Yet, they are starting to run out of venues for action and carry risks are growing fatigued. If US equities dives, so do yen crosses.

Canadian Dollar Traders Prepare for Jobs Data, Volatility
We shouldn’t expect standard fundamental indicators to determine lasting trend from the Canadian dollar at this point – that is something only monetary policy and risk trends can successfully accomplish. That said, meaningful data and substantive surprise can produce serious volatility. That said, tomorrow brings December trade and January jobs statistics. Look to risk-disconnected CAD-pairs at 13:30 GMT.

Australian Dollar Takes Another Hit as RBA Lowers Growth Forecast
It seemed as if the heavy fundamental flow of the week had passed for the Aussie dollar. However, there was another fundamental driver for the currency to absorb this morning. Instead of being fully discounted by the rate decision, the RBA’s monetary policy report weighed AUDUSD further below 1.0300 by lowering the June (2.5 from 2.75 percent) and December (2-3 from 2.25-3.25 percent) growth forecasts.

Gold Unimpressed by ECB Tone, Drops to Support
Though it was veiled in central bank-speak, ECB President Draghi essentially said the policy group was watching and willing to act on the rising euro. The currency devaluation threat isn’t too be taken lightly after five years of Fed stimulus and the BoJ’s rapid ascent in the Currency War. And yet, gold wasn’t convinced. The precious metal – an alternative to currencies – actually dropped back to tightening support at 1,665.

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ECONOMIC DATA

GMT

Currency

Release

Survey

Comments

CNY

Trade Balance (USD)

$24.20B

$31.62B

Demand for foreign goods was weak over 2012.

CNY

Imports (YoY)

23.50%

6.00%

CNY

Exports (YoY)

17.30%

14.10%