Dollar Slow to Offer EURUSD Progress While Stocks Plunge

Dollar Slow to Offer EURUSD Progress While Stocks Plunge
Euro: Be Careful of a Crisis Relief Rally
British Pound Lets its Stimulus Effort End, Sterling Exposed
Japanese Yen Rallies Across the Board, Outpaces Dollar
Swiss Franc May Stay Away from 1.2000 as Authorities Target Greece Tax Evasion
Canadian Dollar: Disappointing Data Amplifies Risk Aversion
Gold Taking Advantage of Dollar Weakness, Financial Uncertainty

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Dollar Slow to Offer EURUSD Progress While Stocks Plunge
Risk aversion has presented itself as a dominant theme this week, so why is the dollar struggling to gain traction? Taking a read on sentiment, we note that the benchmark US equity indexes had grazed serious resistance earlier in the opening 48 hours of the week and subsequently dove into a convincing bear trend. For the S&P 500, that downshift came with a break below 1,400; while the Dow Jones Industrial Average changed hands when it slipped below 13,000. Not only are equities a straight-forward and common measure of sentiment amongst the speculative ranks, but the Fed’s presence has imparted a persistent bias. In other words, expectations that the central bank would quickly absorb any risk that popped up in the market with QE has set the bar exceptionally high for the level of risk aversion needed to turn US stocks.

Yet, turn they did. And given the buildup in market levels against a steadily deteriorating fundamental backdrop (growth slowing, financial stability wavering, etc) it looks like we are still in the early stages of a downturn. That being said, in the height of the risk downturn this week, we have seen the dollar make no move to match the sentiment we’ve seen. The Dow Jones FXCM Dollar Index (ticker = USDollar) itself remains capped below 10,000. For the majors, EURUSD has added no momentum to its otherwise impressive break to two-month lows below 1.2800 and AUDUSD has proven unable to collapse 1.0400. We have seen a break in correlation signal a lack of conviction – a fact that has stalled numerous risk runs in the recent past. If the risk aversion move holds consistent, the dollar would most likely fall into line.

However, there is another possible explanation for the greenback’s unusual departure from sentiment: its safe haven appeal has been undermined. After the US election, we retain a divided Executive and Legislative branch which renders a budget agreement to prevent the fiscal cliff exceptionally difficult. The IMF highlighted the issue this past session when the group said a lack of resolution on the United State’s budget impasse would undermine the currency’s reserve status. Yet, as Standard & Poor’s (the agency that has already downgraded the US) noted, it is unlikely that some form of solution that avoids a $600 billion gouge can’t be found. Therefore, if the risk aversion drive maintains its momentum, the dollar will likely catch up with a rally of its own. On the other hand, a fiscal cliff answer could also lead to a relief rally…

Euro: Be Careful of a Crisis Relief Rally
If the US found a common ground to its budgetary dilemma, the subsequent risk rally would almost certainly benefit the fundamentally-troubled euro and drive EURUSD and EURJPY higher. That said, the burden for direction and conviction doesn’t lie solely on the US situation. The euro-area debt crisis is arguably on the same level in terms of importance – though it is a little more complex. In that multi-layered fundamental situation, though, lies the potential for relief rallies. This past session, officials tempted the bulls by pushing back the deadline on the decision for Greece’s bailout decision (from November 12 to 26). That news accompanied rumors that the country could be given a haircut (lower rates) on its debt and data that showed the jobless rates rose above 25 percent. Spain is the other sticking point as Prime Minister Rajoy continues to hold out for a full bailout request. If he does ask, ECB President Draghi said the OMT program is ready. Are rate cuts an option as well?

British Pound Lets its Stimulus Effort End, Sterling Exposed
A hold by the Bank of England (BoE) is usually a non-event for the sterling. However, this time around, the central bank’s decision not to act was a strategic move. The group’s latest increase to its asset purchase program has topped off at 375 billion pounds. No increase to the program indicates the balance sheet will level off. In the days and weeks before the decision, some MPC members have voiced their doubt that increases to the effort have marginal benefits to the economy due to transmission issues. What is unusual was the lack of a modification to the Funds for Lending program. Under the pinch of austerity, the UK economy is in a fragile position and the BoE seems to be offering little support.

Japanese Yen Rallies Across the Board, Outpaces Dollar
Whether you label it risk aversion or carry unwind, the move away from yield Thursday proved exceptionally beneficial to the Japanese yen. The currency outperformed all of its major counterparts (even posting a 0.66 percent increase over the dollar). Rallying against the investment and fundamentally-questionable foils is easy enough to understand. Yet, the performance of USDJPY – and to a lesser extent GBPJPY – speaks to an inherent strength. That is an issue for Japanese officials who will not take this strength lightly – and neither should we.

Swiss Franc May Stay Away from 1.2000 as Authorities Target Greece Tax Evasion
Economists, analysts and traders all spotted the short-comings of the SNB’s decision to impose a floor on EURCHF: it wouldn’t curb the natural flow of capital seeking safety and thereby rise off 1.2000. Recently, assuaged tail risk from the Euro-area crisis has offered buoyancy, but that confidence is flimsy at best. If policy officials want to change the structural issues while they have the chance, they need to answer the safe haven flow problem. News that authorities were working to identify Greek tax evaders is the exact approach that can dissuade safe haven flows.

Canadian Dollar: Disappointing Data Amplifies Risk Aversion
Though it was a mild performance, the Canadian dollar posted a notable slide against all but the New Zealand dollar this past session. The data on Canada’s docket certainly did little to bolster the currency’s position. The trade deficit contracted in September, but it is only two months up from a record outflow (and six months in the red). Housing starts similarly missed target. With sentiment fading, this was an accelerant.

Gold Taking Advantage of Dollar Weakness, Financial Uncertainty
The combination of risk aversion and dollar weakness is a perfect combination for gold. When investors are seeking haven and they can’t find it is dollars / treasuries, there are few assets for money managements that can match the precious metal for safety. However, if there is a fiscal cliff answer and the Euro-crisis is pushed back to the end of the month; gold may be rendered unnecessary quickly.

ECONOMIC DATA

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Currency

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1:30

CNY

PPI (YoY) (OCT)

-2.8%

-3.6%

Prices expected to be stable as China changes leadership; stable prices may give easing room

1:30

CNY

CPI (YoY) (OCT)

1.9%