Euro Traders Watch More than Risk as LTRO2 Repayment Approaches

Dollar Rally Tapers after EURUSD Break, Dow Faces Next Floor
Euro Traders Watch More than Risk as LTRO2 Repayment Approaches
British Pound: Oversold Sterling Leverages Risk Relief
Japanese Yen Ready to Rally as Officials’ Language Softens
Australian Dollar Rallies after RBA’s Stevens Speech
Canadian Dollar Volatility to Peak on CPI, Retail Sales
Gold Finds First Bullish Close in 7 Days

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Dollar Rally Tapers after EURUSD Break, Dow Faces Next Floor
One thing that has become blindingly clear these past months and years is that risk trends are not easily turned off of their bullish path. It is that stubbornness in sentiment – supported by stimulus – that tempered the slide in equity indexes, carry trade and climb for the greenback this past session. The Dow Jones FXCM Dollar Index (ticker = USDollar) managed to carve out a marginal gain on the day to lift us to yet another two-plus-year high – and notably leave us with a 10,400 close. That said, momentum is the name of the game when it comes to unnerving sentiment and leveraging fear over the complacency of ‘more stimulus’. With the S&P 500 still above 1,500, the market is weighing how much concern there is in the recent FOMC Minute’s revelation that the debate for QE abatement actually has a time frame on it. There isn’t a particular spark to carry risk trends (except a mild possibility for the ECB’s stimulus report), so this may have to be a market-defined risk move.

Euro Traders Watch More than Risk as LTRO2 Repayment Approaches
The euro was firming up in the later hours of Thursday and into the early morning hours today, but effort pales in comparison to the suffering in yesterday’s European – New York crossover. EURUSD’s bullish trend channel dating back to the July reversal was breached at 1.3250 and EURJPY led the yen-crosses back with a stroll below 124.00. The fundamental ground is still very unsteady for the euro since certain European equity indexes started to suffer serious heaves and the ECB made mention of the currency level. This past session, the docket was relatively light , but it hit in most sensitive of areas – recession pain. The Eurozone PMI measure of activity unexpectedly contracted this month.

Heading into the final session of this trading week, the euro is without doubt the most active volatility threat in the currency market. The docket is loaded. Averting our troubled gaze from the weekend’s Cyprus and Italian elections, there is plenty to be concerned about right in front of us. Data will not carry the day. Rather, notable ‘events’ will. The European Commission’s assessment of Spain’s growth and debt forecasts and Winter GDP forecasts are big ticket items on both the financial stability and recession front. But, traders’ should be watching the ECB’s announcement for the first repayment of the LTRO2 program. European banks’ early repayment of their nearly €1 trillion in liquidity loans was what has truly carried the euro higher over the past few months. If this second program is small or large, prepare for volatility.

British Pound: Oversold Sterling Leverages Risk ReliefAside from the coasting risk aversion move that bolstered the Japanese yen, the British pound was the best performer on the day through Thursday. What particularly improved in the fundamental backdrop? An 11.4 billion pound budget surplus was a modest bump for the austerity-bound nation, and the biggest jump for the 10-year gilt this year spoke to a modest return of UK-centric safe haven appetite. Though, the real driver for the pound was the pound itself. Over the past two weeks, the sterling’s best performance has been a 1.6 percent drop against the Canadian dollar just up to a 3.6 percent collapse versus the Japanese yen. A move of that pace is prone to reprieve. Corrections are so named because they are temporary. The building stimulus outlook may taper for the sterling, but risk appetite could easily pick up the charge.

Japanese Yen Ready to Rally as Officials’ Language Softens
A month ago, government officials and central bankers in Japan were practically telling what level the yen should be trading at. Since the G20 meeting, however, their tone has certainly softened – cowed no doubt by global trade partners’ concerns that they have gone overboard. This morning, Finance Minister Aso declined to comment on the level of the currency and instead focused on the BoJ Governor replacement. The same was true from Economy Minister Amari. From a market-moving perspective, finding out who will replace Shirakawa and his two deputies isn’t itself particularly market moving. If the new leaders start to remark on how they plan on moving up stimulus actions or expand upon those that have yet to even be implemented – that would be a difference story. Yet, we aren’t there yet.

Australian Dollar Rallies after RBA’s Stevens Speech
Reserve Bank of Australia Governor Stevens semi-annual testimony was something of a mixed bag, but the market took it as a clear sign that the group was easing back on the rate cutting throttle. Hopeful hawks could allay fears of further cuts in comments such as rates are at an ‘appropriate level now’ and there is a ‘good deal’ of stimulus already. Realistically, though, these are non-committal and in line with previous statements. What was notably overlooked was the repeated concern that the currency is high and that the group would only intervene on behalf of the Aussie if it was indeed deemed overbought – so much for not talking about competitive devaluation.

Canadian Dollar Volatility to Peak on CPI, Retail Sales
Key data is always good as a possible spark of volatility for the Canadian dollar. Therefore, it is worth keeping an eye on the economic docket as we have simultaneous releases for December retail sales and January Consumer Price Index (CPI) data scheduled for 8:30 local time. The consumption indicator is the easier read for fundamental trackers – and a good lead in to next week’s GDP release. However, the inflation figure carries far greater weight for this currency. Ever since the Bank of Canada (BoC) shifted its monetary policy weight off its hawkish footing, the loonie has found itself in a vulnerable position. Headline, annual CPI (the benchmark for policy) is not far from a record low at 1.1 percent…

Gold Finds First Bullish Close in 7 Days
After six consecutive days of declines – the longest bearish run since 2009 – gold finally put in for a bullish close Thursday. Of course, the 0.8 percent advance hardly makes up for the 2.5 percent dive the previous day much less the larger decline over time. The stabilization in risk trends and curb on the dollar’s climb proved a boom for the precious metal. Moving the focus away from abandoning lower liquidity assets and placing it back on those assets that are manipulated by monetary policy is a ready-made booster for the commodity. However, there is no telling how long this positive wind holds. The CBOE Gold Volatility Index dropped from its five-month highs and futures volume held relatively buoyant – though a notable easing from Wednesday’s hard selloff. It will be interesting to see what COT figures show for positioning Friday afternoon.
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