Forex: Dollar Drops the First Time in 4 Trading Days as Risk Frozen

Dollar Drops the First Time in 4 Trading Days as Risk Frozen
Euro Little Moved Despite Greek Bond Issues, Italian Political Shakeup
Australian Dollar Slips Early Tuesday, Follow Through Depends on Equities
Japanese Yen Unfazed by Business Activity, Trade Data
British Pound: BoE Governor King Fears Global FX Wars
Canadian Dollar May Further Progress if BoC’s Carney Says the Right Things
Gold Advances on Third Day Under Lowest Volume In Weeks

New to FX? Watch thisVideo; For live market updates, visitDailyFX’s Real Time News Feed

Dollar Drops the First Time in 4 Trading Days as Risk Frozen
The dollar wasn’t carrying its own weight through the opening trading session of the week. However, a weak environment for speculative turnover and trend development helped to keep the greenback’s losses to a minimum through Monday’s close. The single currency slid against all of its major counterparts – with the exception of a negligible improvement against the Australian currency. That said, the biggest hit the dollar would take was a relatively modest 0.29 percent drop against the kiwi (NZDUSD). On an aggregate basis, the Dow Jones FXCM Dollar Index (ticker = USDollar) retraced Friday’s gains and kept the 10,000-figure firmly overhead. There is relevance in the proximity of this technical boundary and lack of progress to start our week. It shows a syncing between technicals, fundamentals and market conditions.

For fundamental reasoning behind the dollar’s lack of progress, we need only look at the standard bearers for risk trends. From the S&P 500 – one of my preferred, quick measures of speculative appetites – we would see the extremely quiet conditions. The average daily range was the smallest in two-and-a-half months, volume dropped back below 500 million shares and the VIX volatility index continues to retreat. What does this tell us – that the demand for a safe haven like the dollar is tepid at best. We could attribute this quiet to a seasonal withdrawal of market participations, but more likely it is a reflection of anticipation. On Wednesday, the Federal Reserve will announce its monetary policy decisions alongside updated growth forecasts. At this meeting, it is heavily expected that the policy authority introduces a new stimulus program (more on that tomorrow). The influence that this can have will curb speculation on other, lesser factors like a ‘no progress’ read on the Fiscal Cliff.

Euro Little Moved Despite Greek Bond Issues, Italian Political Shakeup
Event risk accumulated for euro traders over the weekend, but the concerns that evolved out of the headlines didn’t seem to be substantive enough to seriously undermine the currency’s health. EURUSD little more than 10 pips higher on Monday’s close and the biggest move for the currency in general was a 0.18 percent drop against the New Zealand dollar. Taking stock of what Forex traders repressed for now, the first concern arose early over the weekend. It was reported that Greece failed to meet its €30 billion bond buyback target (replacing that stock with €10 billion in new debt). The $26.5 billion restructuring at an average rate of 33.4 percent, however, brings us close. In other news, Italy has come back on the threat radar after Prime Minister Mario Monti announced he would step down after the 2013 budget is approved – possibly calling an election by February. The risk that a more lax leader will take the reins one of Europe’s largest debts is unnerving for crisis watchers.

Once again, the euro’s lack of reaction Monday is more likely a sign of anticipation. The Fed policy decision will certainly have repercussions in Europe – and the global financial system for that matter – but there is a more centralized concern for the currency in Thursday’s EU decision on whether to pay out Greece’s next round of aid. In the meantime, the Eurogroup has scheduled a teleconference on the country’s progress today. Furthermore, we may see the market’s vote of confidence with bond auctions for short-term paper for both Greece and Spain.

Australian Dollar Slips Early Tuesday, Follow Through Depends on Equities
We have seen fundamentals at work this morning for the Australian dollar. The lesson learned from this currency’s reaction to the NAB business confidence survey is that the market will only stray from dominant fundamental themes for so long. The sentiment survey printed its weakest reading since April 2009 – a concern for growth that has run heavily on exports and mining sector investment. As concerning as this is, though, it doesn’t trump risk appetite trends behind carry trade interests. AUDUSD won’t likely move far from 1.05 until after the Fed decision.

Japanese Yen Unfazed by Business Activity, Trade Data
Updates from the Japanese economic docket have tapped into the country’s most important sectors. Early Monday, the Ministry of Finance reported 4Q business sentiment had posted its worst reading since the second quarter of 2011. In contrast, the trade figures for October reflected on a slow recovery in exports – though not enough to materially alter the outlook for the country. In terms of influence, this data sits lower on the scale of policy threats made by politicians heading into an election (December 16) much less underlying investor sentiment.

British Pound: BoE Governor King Fears Global FX Wars
While ‘currency war’ isn’t an uncommon term in the policy, academic and trading circles; we certainly don’t hear much of it discussed amongst the world’s largest central banks. Therein lies the surprise that BoE Governor Mervyn King mentioned it as a serious concern of his for 2013 in a speech delivered in New York. The central banker said he was concerned that policy officials could start to use managed exchange rates as a substitute for monetary policy given the limitations of rates and balance sheets. It is serious when the designated cheerleaders are concerned.

Canadian Dollar May Further Progress if BoC’s Carney Says the Right Things
There was Canadian data for loonie traders to work with Monday, but they seemed to take little heed of it. According to the Canada Mortgage and Housing Corporation, new home starts this past month hit a 12 month low – a gnawing but minor concern for those treating the country as a safe haven. For similar reasons, the upcoming trade balance will likely be met with the same level of disinterest (or distraction). Perhaps the currency can overcome its preoccupation with risk trends (which it is loosely correlated with) if the BoC’s Carney bolters his hawkish rhetoric.

Gold Advances on Third Day Under Lowest Volume In Weeks
Some assets rise in low liquidity market conditions and some rise. Gold has proven to be the latter in this case thanks to its connection to the US dollar. In quiet market conditions, there is less of a need for absolute safe havens. While the metal certainly plays a safe haven role, it is the currency it is priced in (the greenback) that is far more susceptible to the restlessness. That said, we find that futures volume dropped to its lowest level (80,357) since the incredible lows at the close of October (before that it was mid-August). Meanwhile, ETF holdings are at a record.

ECONOMIC DATA

Next 24 Hours

GMT

Currency

Release

Survey

Comments

0:01

GBP

RICS House Price Balance (NOV)

-5.0%

-7.0%

House prices continue to decline in the UK