Dollar Corrects after Stumble, EUR/USD Rejects 1.3000

Dollar Corrects after Stumble, EUR/USD Rejects 1.3000
Euro Dives after Latest Greek ‘Rescue’
Japanese Yen Threatening Bigger Rebound
British Pound Bypasses Data, Breakout Readings High
New Zealand Dollar Unfazed by RBNZ’s Warnings, CPI Forecast
Australian Dollar: Unless RBA Cut Outlook Drops Below -50 bps, Watch Risk
Gold Retreats after Short-Lived Rally to 1750

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Dollar Corrects after Stumble, EUR/USD Rejects 1.3000
How conditions can change in 24 hours. In the early hours Tuesday morning, the dollar was on the verge of tipping into a bearish phase that could have changed the prevailing trend from mid-September. For the Dow Jones FXCM Dollar Index (ticker = USDollar), this shift was presenting itself via the drop below 10,000 and the 200-day moving average. However, a well-formed trend channel quickly put in a floor soon after this high-profile breach. For Forex traders, the same sentiment was reflected in the EURUSD’s climb. The pair had charged consistently up to the rounded 1.3000-handle just before the Eurozone convened on a major ‘risk’ factor for global stability: the next steps in the Greece rescue effort. Yet a ‘positive’ outcome for this particular driver brought little buoyancy to speculators. Both euro and US equity futures retreated.

Yet, before we prematurely take a decline in risk to a theoretically encouraging outcome for this key event, we should first assess the risk for its influence and the background market conditions. The Greece crisis is a well-known concern for international traders and the effort made was yet another bid for time rather than long-term resolution. As such, progress here does not exactly stir deeper conflagrations in sentiment. This is particularly true when we reflect in the time of the year we are dealing with as well as the level of speculative participation. Though I give limited credibility to seasonality effects, a consistent drop in volume is one that has proven itself consistent. Furthermore, we have seen in mutual fund flows (consistent withdrawal of capital from equity funds) and 15-year lows to open interestfor S&P 500 futures a persistent lack of speculative participation. That means fewer traders in the build up over the past four years and fewer to unwind against a lack of commitment in unwinding.

A lack of market depth creates problems for generating trends. When a move (risk on or risk off) develops, it is difficult to keep going because there are fewer buyers to jump onto a trend and fewer to unwind. Our issue now is the moderating effect it has on jumpstarting new moves. Considering a sizable portion of available has been held off to the sidelines, the smaller pool reduces the marginal sensitivity to sentiment changes (there are fewer flippant market participants to build the initial move). However, with the right encouragement, these markets can be put on pace. Yet, the Eurozone crisis has bought time, the Fiscal Cliff has more than a month to play and other issues are even less pressing…

Euro Dives after Latest Greek ‘Rescue’
If the Eurogroup’s progress in securing Greece fresh accommodation was a step towards restoring stability and growth to the Eurozone, you wouldn’t be able to tell from the currency’s performance. In fact, the euro has slid against all of its counterparts (with the exception of the Swiss franc) since the additional measures for the region’s most debt-laden country were announced. Perhaps this is a sign that the market’s are learning – or at least acclimating. Though the group announced plans to offer a €43.7 billion payment, reduced loan rates, returned profits on debt, an extended payback window and a bond buyback program; the market recognized two things: a bid to buy time and contingencies. These measures do not solve the long-term recession the country is suffering. Just as important to those that have been disappointed by the EU Summit in late June and ECB’s OMT program in September, there are conditions that must be met before these measures are activated. At this point, the euro has processed the Greek news and is looking for another driver: perhaps underlying risk or even a revival of Spain concerns.

Japanese Yen Threatening Bigger Rebound
The Japanese yen has turned to congestion and is now threatening a rebound. The aggressive decline from the renowned funding currency was partially helped along by the advance in risk trends over the past few weeks, but the escalated threats by policy officials to remove all stops to ongoing stimulus has pulled more than its fair-share of the currency’s tumble. The only problem with that factor as an active selling point is that both the DPJ and LDP parties have laid out the measures they plan to take should they secure the election. The market has priced in the verbal threats and now has until December 16 before we actually see these threats fulfilled. In the meantime, a risk aversion move can take the yen.

British Pound Bypasses Data, Breakout Readings High
We had a round of UK data this past session, but the pound offered little immediate reaction to its release. That was likely because it was a second round release of the 3Q GDP figures. The headline figures changed little (the year-over-year growth reading actually reported a 0.1 percent contraction), but the components showed notable change with an increase in government spending and exports while fixed capital formation and consumption slipped. More interesting to sterling (specifically GBPUSD) traders should be the backdrop yield and activity reads. The yield differential between UK and US 10-year yields is the highest since February and GBPUSD activity (ATR) is near the lowest in years.

New Zealand Dollar Unfazed by RBNZ’s Warnings, CPI Forecast
Risk trends don’t seem to elicit much of a rise out of the kiwi nowadays, but that is likely due to the lack of momentum behind the sentiment trends. In this environment, standard fundamental releases could have more of a impact – if only there was substantial change. The RBNZ’s 2-year CPI outlook for the 4Q printed unchanged at 2.3 percent. And Governor Wheeler offered a weak concern over the impact of the high kiwi.

Australian Dollar: Unless RBA Cut Outlook Drops Below -50 bps, Watch Risk
There was something of a buffer for the Australian dollar in interest rate expectations as long as risk trends weren’t showing heavy momentum. That said, the improvement in the 12-month rate forecast for Australian (from a forecast of 150 bps worth of cuts) seems to have hit a ceiling with the outlook capping off at 50 bps of easing over the same period. Without this fact, Aussie pairs will turn back to the risk bearings.

Gold Retreats after Short-Lived Rally to 1750
Gold was bound to have found a sharp through the end of last week or the beginning of this week given the extreme congestion surrounding the metal. Yet, the bullish run on Friday lacked for the necessary ingredients in follow through. With the Greece threat seemingly on ice and risk trends fading, this commodity is once again clearly taking direction from the dollar. If the USDollar overtakes 10,000, gold can quickly drop 1725.

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