Dollar Gains but Trend First Requires a Serious Breakout
British Pound: BoE’s Carney Says QE Possible, Cable Rebounds Above 1.5500
Japanese Yen Rally Stalled as Nikkei and Carry Trade Put in a Weak Bounces
Euro Looks for Volatility – Not Trend – With Upcoming Event Risk
Oil Trades above $110 and at a Two-Year High on Syrian Concerns
Emerging Market Currencies: Indian Rupee Collapse vs Brazilian Real Stability
Gold Matches Strongest Run in 12 Months…and it’s Not a Reversal Signal

Dollar Gains but Trend First Requires a Serious Breakout
With the exception of NZDUSD, the US dollar posted gains against all of its major counterparts this past session. In turn, we find the Dow Jones FXCM Dollar threatening to turn congestion into a meaningful bull trend with the right encouragement. However, that breakout (technically demarked on the index at 10,760 or below 1.3300 for EURUSD) requires a stronger drive than what the benchmark has mustered to this point. Looking to the fundamental backdrop, the recent tumble in equities, capital outflow from emerging markets and surge in energy prices is a strong tonic for a reserve currency like the greenback. Yet, the risk implications are not yet heavy enough to spark the guttural demand for an ultimate reserve currency that is burdened by the outflow of capital due to foreign Treasury unwindingahead of the Taper. If fear builds to a crescendo where liquidity is prized above all else – a market-wide deleverage from risky assets – both the dollar and US Treasuries will surge.

British Pound: BoE’s Carney Says QE Possible, Cable Rebounds Above 1.5500
Sterling traders were prepared for volatility in response to Bank of England (BoE) Governor Mark Carney’s policy speech, and they weren’t disappointed. The talk in Nottingham was the central bank head’s first official speech on subjects, but its importance was set by the changes that he has already presided over through the past two months. Following the BoE’s adoption of forward guidance as a possible replacement policy default to quantitative easing, the market has worked to unwind the bearish pressure heaped on the currency through the opening months of the year. The recovery effort from recession fears and stimulus bloat has been underway for some weeks, but there is still adjustment to be had. A remark from the Governor that stimulus was still an option going forward should the swell in rates curb growth confirmed there is a bearish argument, but it didn’t surprise the market. What it may do, however, is curb the belief that there is a sterling discount to work off.

Japanese Yen Rally Stalled as Nikkei and Carry Trade Put in a Weak Bounces
This week’s most impressive trend – the Japanese yen’s hearty rally – came to an end this past session just as serious technical resistance came into view for the single currency. To overtake the next hurdle on the charts would be a sign of conviction that the market does not seem willing to commit to just yet. In the balance, we have an exceptional Bank of Japan stimulus program providing buoyancy to pairs like USDJPY and EURJPY, while record low carry is pressuring the market to reversal. The central bank’s effort is consistent but fully priced in. The carry gap will be defined by risk trends. So, we watch capital flows. That said, the Nikkei 225 has steadied and the 10-year JGB hit a three month high.

Euro Looks for Volatility – Not Trend – With Upcoming Event RiskThere was little consistency and drive from the euro this past session. Finding some reprieve from Tuesday, Euro-area’s equity benchmarks pulled up from their painful dives and credit risk stabilized. That said, sovereign bond yields rose for nearly the entire region and the regional VSTOXX volatility measure extended its drive higher. The euro – like the backdrop capital markets it represents – is prone to a breakout and rapid swell in volatility. Looking at implied volatility measures or a simple Average True Range (ATR) we find complacency exceptionally high as technical boundaries grow tighter. A breakout with trend implications would be best served for FX traders, but euro-based fundamentals have generated limited engagement from the market. Instead, we should watch for simple breakouts – possibly on the German jobs report.

Oil Trades above $110 and at a Two-Year High on Syrian Concerns
The CBOE’s oil volatility index tells the story. In the past two days, the activity indicator (considered by many a gauge of fear) has soared 25 percent. This incredible jump in activity comes thanks to a rally in the underlying commodity – as much as $6.30 or 6 percent over the same period. This drive was enough to push the benchmark US oil futures contract to $112 per barrel and mark the highest level for the commodity since May of 2011. The source of this drive is clear – the United States’ and Western nations’ threatening to take actions in Syria in response to the alleged use of chemical weapons on rebels. The supply-and-demand risk is clear, but there is a countervailing force at work as well. As energy costs skyrocket, struggling economic growth is further put in jeopardy and demand fades alongside risk trends. The draw for an oil reversal is strong, but it will be a risky proposition until Middle East tensions cool.

Emerging Market Currencies: Indian Rupee Collapse vs Brazilian Real Stability
There is a divergence in the performance of the emerging markets and the currencies that fit the grouping. On one extreme, we have the Indian Rupee which suffered an incredible 4 percent collapse just this past trading day to stoke fears of an uncontrolled crash. At the opposite end of the spectrum, we have the Brazilian Real which has recovered as much as 5.4 percent of its aggressive three-month, 20 percent plunge through last week. Much of the difference in performance between these two has to do with the policies that officials have implemented. Brazil’s central bank introduced a $60 billion FX program last week aimed at curbing panicked demand for US currency and its central bank raised the benchmark lending rate 50 bps (to 9.00 percent) Wednesday evening. This is a concerted effort to curb instability and to keep capital in Brazil. In contrast, India’s effort has been limited to its own central bank offer access to dollars (through swaps) only to its three largest, domestic oil companies. For the emerging markets as a whole, the MSCI fund stabilized this past session. Any hint of risk aversion though..

Gold Matches Strongest Run in 12 Months…and it’s Not a Reversal Signal
Though Wednesday’s 0.2 percent advance was the smallest in gold’s series of daily gains, it was nevertheless the fifth consecutive climb for the precious metal. That matches the longest run since August 23 of last year – before the massive bear leg began in October. Throughout this period, there have been 10 instances of four-plus day rallies for the commodity; and the move that often followed was a stumble that reengaged a dominant trend. Yet, the tide in momentum is changing. Gold is up over 20 percent from its mult-year low on June 28th, and the push has proven consistent enough to turn the 20 and 50-day moving averages positive. If we see a natural turn after an impressive run under these circumstances, it is likely to prove the correction rather than the trend – that is, unless there is a strong fundamental push to undermine bulls. The greatest threat to the precious metal would be a rally from the greenback based on risk. Investors are still sore from gold volatility.

**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

ECONOMIC DATA

GMT

Currency

Release

Survey

Comments

1:00

AUD

HIA New Home Sales (MoM) (JUL)

3.40%

Growth has been positive since March.

1:00

NZD

NBNZ Business Confidence (AUG)

52.8

Last month, business confidence rose to its highest level since March 1999.

1:00

NZD

ANZ Activity Outlook (AUG)

43.7

1:30

AUD

Private Capital Expenditure (2Q)

0.00%

-4.70%

Growth has been slowing since the first quarter of 2012.

7:55

EUR

German Unemployment Change (AUG)

-5K

-7K

The German economy has been adding fewer jobs since March 2010.

7:55

EUR

German Unemployment Rate s.a. (AUG)

6.80%

8:30

GBP

Lloyds Business Barometer (AUG)

The index has been positive since August 2012.