Forex Analysis: Dollar Quietly Breaks 1.2700 as Risk Trends Slow to Take

Dollar Quietly Breaks 1.2700 as Risk Trends Slow to Take
Euro Slides as Officials Discuss Greece’s Growing Stimulus Need
Australian Dollar Jumps after Weekend Chinese Trade Data, Risk Sensitive Now
British Pound Faces 200-Day Moving Average Ahead of UK Data
Japanese Yen: Recession and Stimulus Signals Fail to Sway Safe Haven Flows
New Zealand Dollar: Should Traders Expect Another Spike in Response to Retail Sales?
Gold Threatens Reversal as Volume Cools, Fiscal Cliff Fears Ease

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Dollar Quietly Breaks 1.2700 as Risk Trends Slow to Take
The dollar – like the broader capital and Forex markets – was virtually unmoved through Monday’s trading session. To get a sense of the activity level for the day, we find that the FX Volatility Index hit a fresh 5-year low, the average true range (ATR) on EURUSD held just above its own multi-year low and volume on the benchmark US equity indexes was the lowest seen since the holiday period of 2009. The bank holiday in the US (for Veterans day) certainly curbed its fair share of speculative interests and the impasse on the most prominent fundamental concerns ensured full restraint. All that considered, though, we still find risk aversion making progress this morning and the dollar slowly inching out progress. EURUSD has slipped below 1.2700 while working on its fifth consecutive decline and GBPUSD is hovering just above its 200-day moving average at 1.5850. With the Dow Jones FXCM Dollar (ticker = USDollar) knocking on 10,000, pressure is building.

Top two concerns for the greenback to start this week are risk trends and the Fiscal Cliff. Just as surely as these two themes can act as drivers for the reserve currency and general financial markets, they can also anchor these assets. In the balance between risk and reward, volatility is still the odd-man-out. The implied volatility measures essentially measure insurance costs against an aggressive, adverse move in underlying markets – in other words ‘risk’. Yet, with the currency market fear measure at fresh five-year lows (7.54 percent) and the standard VIX Index for equities retreating from the highs of the past three months (just below 20 percent), there is little stress on the markets to force FX traders to the safety of the US dollar.

Taking a tentative change in tack, however, we can already see risk trends start to stir again in the early morning hours of Tuesday. With the dollar (and many of its pairings) so close to a significant breakout, traders will be on edge looking for substantive moves. That said, it is the follow through that make the trade – not just the break. To carry through on meaningful technical moves, we need the themes to kick in. US politicians from both sides of the political isle have taken the opportunity recently to voice their belief that a deal can be struck to avoid the Fiscal Cliff at year’s end. That would alleviate the threat to US ratings (dollar bullish), but it could also ease pressure on risk trends (dollar bearish). This morning though, it seems the dollar is tentatively seeing the best of both worlds: easing downgrade threats without pulling back on risk.

Euro Slides as Officials Discuss Greece’s Growing Stimulus Need
Though its slide was restrained (owing to the tempered pace of underlying speculative trends), the euro was still trading lower against all of its major counterparts this past session. Had volatility been more a prevalent factor, conditions could have been very different for the world’s second most liquid currency. Nevertheless, the consistency in the euro’s decline was founded on an interesting mix of developments. Over the weekend Greece’s Parliament approved the 2013 budget (along with its austerity measures) and EU officials assured that the €5 billion in debt coming due Friday would be rolled forward to avoid a technical default. Despite this bid to ‘buy more time’, the market showed little optimism. Just as prominent was news that the country would be granted another 2 years to meet its target deficit-to-GDP ratio…at a potential cost of an additional €32.6 billion. The markets are growing impatient with quick fixes. Coming up we have another EU meet and Greek bond auction.

Australian Dollar Jumps after Weekend Chinese Trade Data, Risk Sensitive Now
The correlation between AUDUSD and the S&P 500 has improved over the past week, but the relationship is still closer to random than the common risk trend-defined drive we are used to. That skew was temporarily bolstered to open the week when the market had a chance to respond to the Chinese trade figures (the $32 billion surplus for October – highest since 2009 – was reported on Saturday). With the 12-month RBA rate outlook topping out, the Aussie dollar is likely to reconnect to risk trends. Now, we need a clear push for yield or liquidity.

British Pound Faces 200-Day Moving Average Ahead of UK Data
Taking a page from the euro’s book, the pound is lower against all of its counterparts with the exception of the euro so far this week. The spillover concerns with the Euro-area situation are certainly there (the UK’s decision to shoot down the EU budget certainly didn’t help), but they won’t likely carry the sterling unless a euro-bound move really takes off. That leaves us in need of clear catalyst while GBPUSD hovers just above the 200-day moving average at 1.5850. The upcoming UK inflation data can help with that, but it will be hard to force selling there.

Japanese Yen: Recession and Stimulus Signals Fail to Sway Safe Haven Flows
Newswires have not been kind to Japanese financial markets to start the week. On the economic docket, the first reading of 3Q Japanese GDP reported a 3.5 percent contraction on an annualized basis. That may be just slightly worse than expectations, but it is still the worst performance for the world’s third largest economy since the earthquake (first quarter 2009). This painful reading prompted the Prime Minister and BoJ governor to warn that more stimulus / intervention may be on the way, but traders seem to expect little traction to these efforts.

New Zealand Dollar: Should Traders Expect Another Spike in Response to Retail Sales?
Over the past couple of weeks, the kiwi dollar has found itself particularly prone to volatility generated through fundamentals. The third quarter employment figures were particularly market moving. We should be cautious of the same in the upcoming session with the retail sales report for the same period on deck. The bar is set rather low at a 0.4 percent pickup expected, but feeding into risk aversion would carry the most weight.

Gold Threatens Reversal as Volume Cools, Fiscal Cliff Fears Ease
Over the past two active trading days, gold has lost its bullish momentum and started to threaten a reversal. To truly gain traction, we need two things. First, a true advance from the US dollar would negate the need for the anti-fiat / anti-inflation asset. Second, if the fiscal cliff concerns continue to abate, the stability of the financial system will be reinforced and the metal with no yield and questionable liquidity will be ease.

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