Forex: Dollar Looks for Breakout Under Fiscal Cliff Insecurity

Dollar Looks for Breakout Under Fiscal Cliff Insecurity
Euro Marches Lower Towards 1.2600 as Market Fed Up with Buying Time
Japanese Yen Has 3Q GDP on the Open, Bond Bill Vote Later
British Pound: Default Risk Suggests UK Real Safe Haven
Australian Dollar May Open Monday with a Pop After Chinese Trade Data
Swiss Franc Safe Haven Status Degrading Alongside Euro, Dollar
Gold Calls an End to First Four-Day Rally Since August

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Dollar Looks for Breakout Under Fiscal Cliff Insecurity
The US dollar ended this past week on a positive note…barely. While the greenback has made progress with a EURUSD drop below 1.2750 and GBPUSD close below 1.5900, its performance is far from consistent or convincing. To take full stock of the currency’s performance, we should note the 1.2 percent drop against the Japanese yen and 0.5 percent decline versus the Australian dollar. That is a very telling mix for the fundamental health of the world’s reserve currency. AUDUSD is known as one of the premiere carry trade pairs and yet it can’t manage a selloff when US equity markets took a serious step into its bearish phase? USDJPY is a far better measure of inherent strength (an effective separation from risk trends). Despite debt and intervention concerns in Japan, the yen still gains against its US counterpart.

What would a serious strengthening of the greenback look like? A rally from the Dow Jones FXCM Dollar Index (ticker = USDollar) above 10,000 would mark a prominent technical breakout from a measure that takes the temperature against carry, reserve and fundamental comparisons. Individually, a clear and strong bear trend from EURUSD and AUDUSD along with a rally for USDJPY above 81.00 would spell a uniform and unique strength to the benchmark currency. Now that we know what a true dollar rally would look like, what would spark it?

The trouble the dollar faces is the marginal decline in its safe haven value through the fears related to the looming Fiscal Cliff. The likelihood that US politicians would allow the country to suffer abrupt tax hikes and spending cuts that lop $600 billion off of GDP and tip the economy into recession is exceptionally low. Furthermore, the issue does not really become pressing until the end of the year (and we have seen what the market is willing to tolerate when officials buy them a little time). That said, the risk is still there. A US recession alone would not dissuade capital from flowing into the US haven asset. Au contraire, the global impact such a development would have would accelerate inflows into dollars and Treasuries. The sticking part here is that driving off the fiscal cliff would invite a likely downgrade – a serious blow to the currency’s relative safe haven appeal. President Obama and Speaker of the House Boehner made it clear in their respective statements that the tension is still on. In the meantime, however, the stronger the risk aversion move, the more support the dollar will find.

Euro Marches Lower Towards 1.2600 as Market Fed Up with Buying Time
EURUSD has fallen for six of the past seven trading days and EURJPY five of the past six. We could attribute this performance to risk trends alone, but the eight consecutive day tumble from EURAUD would add a conflicting element to that explanation. The reality of the situation is that the euro itself has weakened substantively the past two weeks. On the other hand, there has been some level of restraint to the selling pressure. But, that can change with the event risk coming up and with 1.2600 (EURUSD) and 100 (EURJPY) in view. This past week, bulls were hammered by a deferment of Greece’s aid tranche, downgrades in the 2013 GDP outlook and a turn in general sentiment. To top this unfavorable wave, we will need to see a consistent disappointment in the upcoming 3Q GDP readings as well as a consistent path of crisis for the government funding market. Core Eurozone growth figures are due Thursday, but watch Greece and Portugal on Wednesday more closely.

Japanese Yen Has 3Q GDP on the Open, Bond Bill Vote Later
Japanese yen traders have a big week ahead of them. To start things off immediately, the 3Q GDP figures are due early Monday in the Tokyo session. The consensus forecast is calling for a painful drop from the annualized 0.7 percent expansion reading in the period through June to a 3.4 percent plunge through the past quarter. That would be the worst pace of performance since the aftermath of the earth quarter (and before that the Great Recession). If we are looking for serious influence over the currency though, the Upper House bond bill vote will be far more critical. This is necessary for avoiding a Japanese version of the fiscal cliff. Of course, relief could cause pain for officials with a yen rally…

British Pound: Default Risk Suggests UK Real Safe Haven
It is difficult to find a safe haven in the global markets nowadays. The US faces a possible downgrade, Japan’s financial health is finally starting to come off the rails and Germany is being drug down by its Eurozone neighbors. What about the UK? Though at EU members, the country has ensured a fire break by rebuffing increases to the region’s budget (increasing their cost and exposure). Looking at default risk, the UK CDS is lower than both its US and German counterparts. It wasn’t too long ago that the pound was the world’s reserve currency …

Australian Dollar May Open Monday with a Pop After Chinese Trade Data
Monday’s open will be interesting for the Australian dollar. Having distanced itself from the risk aversion move last week, the currency has the opportunity to respond to something tangible – the Chinese trade data released Saturday morning. The October trade balance hit its highest surplus since January 2009 ($32 billion) – though the extra time for analysis may lead traders to appreciate the 12 percent drop in trade with Australia month-over-month. For a lasting trend, risk trends will inevitably take over. And persistent risk aversion will cave the Aussie’s strength.

Swiss Franc Safe Haven Status Degrading Alongside Euro, Dollar
Traders often ask whether the Swiss franc is an ideal safe haven now that the US and Japanese currencies are facing crises of confidence. The short answer is ‘no’. The harbor status of the franc is tied to Switzerland’s banking sector – a harbor for international investors from prying eyes and taxes. Yet, over the past few years, Swiss authorities have yielded to foreign tax records. And, the SNB’s intervention doesn’t help…

Gold Calls an End to First Four-Day Rally Since August
Spot gold closed Friday 0.27 lower than the previous day. That called a technical end to the metal’s four day rally – the longest such bull move since August 24. This was a fitting end to the week. Elsewhere, COT figures show speculative interest has cut longs for four consecutive weeks. Furthermore, the dollar has held its own while both Euro-area and US crises have been temporarily been deferred. It needs more power.
**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar
ECONOMIC DATA

Next 24 Hours

GMT

Currency

Release

Survey

Comments

(Sun)

CNY

Trade Balance (USD) (OCT)

$27.20B

$27.67B

Still-growing exports present more optimistic picture of Chinese economy

(Sun)

CNY

Exports YoY% (OCT)

10.0%

9.9%

(Sun)

CNY

Imports YoY% (OCT)

3.0%

2.4%

(Sun)

CNY

New Yuan Loans (OCT)

595.0B

623.2B

Fall in credit could suggest additional easing to prevent major economic slowdown

(Sun)

CNY

Money Supply – M0 (YoY) (OCT)

12.9%

13.3%

(Sun)

CNY

Money Supply – M1 (YoY) (OCT)

7.1%

7.3%

(Sun)

CNY

Money Supply – M2 (YoY) (OCT)

14.5%

14.8%

23:50
(Sun)

JPY

Tertiary Industry Index (MoM) (SEP)

-0.1%

0.4%

Services industry still growing

23:50
(Sun)

JPY

GDP (QoQ) (3Q P)

-0.9%

0.2%

Japanese productivity expected to pick up, though weakness still exists

23:50
(Sun)

JPY

GDP Annualized (3Q P)

-3.4%

0.7%

23:50
(Sun)

JPY

Nominal GDP (QoQ) (3Q P)

-0.9%

-0.3%

23:50
(Sun)

JPY

GDP Deflator YoY (3Q P)

-0.7%

-0.9%

23:50
(Sun)

JPY

Domestic CGPI (YoY) (OCT)

-0.8%

-1.4%

Corporate goods prices continue to fall, suggesting deflation continuation

23:50
(Sun)

JPY

Domestic CGPI (MoM) (OCT)

-0.2%

0.3%

23:50
(Sun)

JPY

Loans & Discounts Corp (YoY) (SEP)

0.24%

Credit at moderate levels

(Mon)

AUD

Average Weekly Wages (QoQ) (AUG)

0.4%

Secondary labor data may improve on credit

(Mon)

AUD

Average Weekly Wages (YoY) (AUG)

3.4%

0:30

AUD

RBA Credit Card Balances (SEP)

$A49.2B

Falling purchases suggest RBA has room for additional easing

0:30

AUD

RBA Credit Card Purchases (SEP)

$A21.7B

0:30

AUD

NAB Business Conditions (OCT)

-3

Survey showing effects of slower Chinese demand for raw materials

0:30

AUD

NAB Business Confidence (OCT)