Forex: Dollar Advances as Risk Cools, Is this an AUDUSD Reversal?

Dollar Advances as Risk Cools, Is this an AUDUSD Reversal?
Japanese Yen: BoJ Increases Stimulus, Market Not Impressed
Euro Climb Slowing, Heavy Event Risk Ahead
British Pound Edges Up, Retreats after BoE Minutes
New Zealand Dollar Dropping Well Before Disappointing 3Q GDP
Australian Dollar Correlation to Risk Trends Rebounding from Two Year Low
Gold Threatens to Break 1665 Floor Despite Thinning Trade

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Dollar Advances as Risk Cools, Is this an AUDUSD Reversal?
Though the developments of the past weeks certainly support the running of a relief rally in speculative positioning, the climb that has ensued arguably outlived its fundamental basis long ago. Risk appetite and grounded fundamentals can and diverge, but eventually the two will reconverge. And, we may have very well seen that shift towards convergence this past session. A thematic ‘risk’ based trend is one of the most influential fundamental forces in the market; and considering it is the foundation of every trading decision made, it very often carries systemic, cross market trends. During Wednesday’s session, equity indexes, bond yields, EURUSD, AUDUSD and yen crosses offered a coordinated reversal. The gravity of this slip in risk trends naturally bolstered the FX market’s favored safe haven: the US dollar. The greenback advanced against every one of its counterparts through the session and the Dow Jones FXCM Dollar Index (ticker = USDollar) posted a 0.2 percent advance. Yet, this is a tentative and unconfirmed move. A reversal may require more tending than the market can provide.

With technicals showing a break in the fever of building risk, there is a chance that the discrepancy between market levels and fundamentals can be closed. However, there is a serious hang up to this equation in the quickly dwindling window for liquidity. Next week, a significant portion of the market will be offline for the holiday; and the ability to generate a serious and lasting trend during such conditions is extremely limited. So, we only have between now and the weekend to establish a meaningful push before volatility and directionless chop take over. In that short time span, a committed risk aversion drive (opening positions to speculate on a decline of overextended currencies / assets) is less likely. On the other hand, a move to book profit or unwind precarious exposure is far more likely. And, given the considerable trend over the previous four weeks, that would denote a natural correction that can support the dollar. That is, as long as a major development doesn’t spark last minute speculative appetites – like a Fiscal Cliff deal. Of course, a resolution is the baseline assumption; so even that driver’s influence is tempered.

Japanese Yen: BoJ Increases Stimulus, Market Not Impressed
Many of the most carry- and risk-sensitive yen crosses have finally put on for a pull back – the first in a long time for many of these pairs. For reference, the USJDPY is in the red for the first time in four days, AUDJPY in seven and EURJPY in eight trading days. Japanese policy officials have worked diligently to forestall the inevitable correction after the massive 20 percent surge from pairs like EURJPY over the past five months. This week started off with the election that ushered the stimulus-friendly LDP party back to power offered a late push to multi-month and multi-year highs. That could have very well proven an exhaustion gap leading into a reversal had income Prime Minister Abe not scrapped the budget spending cap and reiterated his demands for the BoJ to increase its stimulus efforts – good timing ahead of the rate decision.

Central bank Governor Shirakawa heeded the government’s call this morning with a decision this morning to increase the asset purchase program by 10 trillion yen to 76 trillion (making for a 101 trillion stimulus program with the credit loan facility). This is a notable step, but one that the market had expected well in advance. And, as for the downgrade in growth forecasts and inflation consideration in January, it doesn’t forestall a natural inclination to take profit on the short-term carry trades that were looking only for capital gains.

Euro Climb Slowing, Heavy Event Risk Ahead
While EURUSD broke its longest bull run (a seven-day advance) since April 2011, the euro itself was showing surprising strength elsewhere. In fact, the shared currency managed gains against every one of its other major counterparts. That said, progress is diminishing. The headlines from this past session were once again light in content. News that Greece’s debt can be used as collateral to top ECB loans is a write off after its rating was restored after the second restructuring. More influential perhaps is the upcoming Eurozone consumer confidence, Spanish housing permits and Spain, Greece and Portuguese current account balance data. The relief rally needs to be backed up by real encouragement.

British Pound Edges Up, Retreats after BoE Minutes
Rarely do FX traders act on the Bank of England’s rate decision because the central bank is silent when it doesn’t change policy. So, we wait for the minutes of the meeting. This past session, the details of the gather revealed there was a lone call for 25 billion pounds in additional stimulus that was voted down 8-1. More interest was a near-term inflation concern and a concern that a high sterling would hurt the economy.

New Zealand Dollar Dropping Well Before Disappointing 3Q GDP
Maintaining positive growth may seem a feat when compared with the Eurozone, but it is essential for those investment currencies that are riding on the sanctity of their yields. That said, the 0.2 percent 3Q GDP reading early this morning drew the bears out as it was half the market consensus. As if that wasn’t enough, the previous quarter’s 0.6 percent growth reading was cut in half through revision.

Australian Dollar Correlation to Risk Trends Rebounding from Two Year Low
The Australian dollar is one of the FX markets favorite investment currencies; and through that role, it should advance when ‘risk appetite’ climbs. However, that relationship has broken down considerably over recent months. In fact, the AUDUSD’s correlation (20 day) to the S&P 500 (another favored risk gauge) dropped to its lowest level since in two years. Though with the early risk pullback, we see it tightening again.

Gold Threatens to Break 1665 Floor Despite Thinning Trade
Following Tuesday’s aggressive breakdown for gold, it would be a reasonable assumption to see the precious metal bounce. That is particularly true given the lack of follow through on the dollar and tepid risk aversion sentiment – two factors that are typically treated as key gold catalysts. And yet, the metal hovers just above its 200-day moving average and mid-point of its 2012 range at 1665. If the dollar were to make a serious push higher before week’s end, gold could clear out a serious level of support.

ECONOMIC DATA

Next 24 Hours

GMT

Currency

Release

Survey

Comments

JPY

Bank of Japan Rate Decision

0.10%

Abe wants more aggressive stimulus. It’s unclear whether the BoJ will deliver this time.

2:00

CNY

Conference Board China Leading Economic Index

According to many economists, the Chinese slowdown has stabilized. Look for a favorable print to indicate strong growth going forward.