Forex: Dollar Retreats to Channel Support on Fiscal Cliff Musings

Dollar Retreats to Channel Support on Fiscal Cliff Musings
Euro Recovers from 1.2900 Tip but Little Individual Strength
Swiss Franc: SNB’s Jordan Suggests There is No Limit to Stimulus
Australian Dollar: Rate Outlook Fading, Risk Trends Firming
British Pound Drops Even Against the Dollar and Yen Wednesday
Japanese Yen Falters as Risk Trends Tentatively Offset Fresh Stimulus Worries
Gold Suffers Second Biggest Daily Drop in Five Months Despite Dollar Slip

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Dollar Retreats to Channel Support on Fiscal Cliff Musings
The Forex market’s preferred safe haven and reserve currency – the US dollar – took a tumble during the US session Wednesday, and the currency has yet to recover. To confirm there was a risk-based influence behind this drive, we can look at the other common measures for sentiment change. The yen had also shown a sharp decline and the S&P 500 leveraged its biggest intra-day rally since November 1. Rounding the assessment out with a drop from the traditional volatility measures alongside an increase in the Risk-Reward Index and in we are offered perhaps one of the strongest measures of conviction in some time. The only problem is that there was limited fundamental support for the move.

Market sentiment can ebb and flow without the encouragement of a particular economic indicator or event, but such a move in these kinds of market conditions (consistently bleeding speculative participation) is likely to lose momentum quickly without tangible support. Looking to the headlines at the same time the market started to rumble, there was a questionable mix of news. The new homes sales figures for October were certainly not contributing with a 0.3 percent contraction and sharp downgrade to the previous month (from a 5.7 to 0.8 percent pickup). The more prominent news were the sound bites from US politician speaking about the Fiscal Cliff. The only definitively positive take away from the remarks were confidence from President Obama and Speaker Boehner that a resolution could be reached before the countdown expired. Yet, this optimism wasn’t backed by detail nor give on either side towards a compromise. The only glimmer of flexibility came from the suggestion by President Obama that he wouldn’t insist that tax rates on top earnings would have to return to the levels during the Clinton administration.

Yet, is this give on tax hikes and promise from Republicans to close loopholes enough? If indeed, the climb in sentiment was based on Fiscal Cliff hopes, then the advance in equities and bearish pressure on the dollar will quickly fall apart without something more progressive to build on. President Obama is scheduled to have lunch with his former campaign opponent Mitt Romney Thursday. Though Romney is not a key player in the stimulus debate, he has convened with those that have been involved; and the meeting is considered a general ‘good will’ meeting between two dangerously opposed political groups. Outside of further, encouraging commentary on this front, there are few other scheduled events that can be expected to carry a heavy influence over risk trends. The Eurozone crisis is on ice and US data is distinctly second tier.

Euro Recovers from 1.2900 Tip but Little Individual Strength
Through the European trading hours Wednesday, EURUSD was making serious progress to a deeper reversal from the 1.3000 failure following the reaction to the Troika’s agreement to move forward with Greece rescue steps. However, shortly after the pair dropped below 1.2900, the market made an abrupt turn to eventually shift bearish trend development into a positive close. The question fundamental traders must ask is whether this was a move derived from euro strength or a consequence of the risk appetite swell that hammered the dollar? A quick glance at the euro’s performance against its higher-yield counterparts, tells us it was ‘risk’. Looking at the developments on the day for Europe, there were a few highlights. Authorities approved a €37 billion fund release to Spanish banks in return for three lender to reduce their balance sheets by more than 60 percent, job cuts, write downs, and a fourth to be sold off. In contrast, Germany’s Finance Minister said Greece may require more funding and a bond buyback program was critical. In addition, there was talk of Italy needing a bailout and France being downgraded in 2013.

Swiss Franc: SNB’s Jordan Suggests There is No Limit to StimulusWe haven’t heard big talk from Swiss National Bank (SNB) officials in some time, but group President Jordan’s made up for the radio silence. The central bank reiterated the commitment to preventing the franc’s rise with a distinct declaration that there should be no limits on his balance sheet if they were to ensure successful policy. In essence, that is tantamount to vowing unlimited stimulus. A few more highlights to his remarks were notes that 12 percent of the SNB’s reserves were foreign equities and they were diversifying into currencies like the Canadian and Australian dollars. Despite all this, EURCHF did not rally. For volatility, traders should watch the upcoming 3Q Swiss GDP release.

Australian Dollar: Rate Outlook Fading, Risk Trends Firming
A rising tide lifts all boats. That is certainly the case for the Australian dollar. The currency has found a lift from a rise in equity markets and general investor sentiment. Luckily, for Aussie bulls, this buoyancy was enough offset a deterioration in the interest rate outlook. The probability of a rate cut at the next meeting (measured in swaps) hit 71 percent – the most in over a month. The 12-month outlook similarly worsened.

British Pound Drops Even Against the Dollar and Yen Wednesday
Despite the tumble from safe haven currencies this past session, the pound would still post a loss against all of its major counterparts on the day. An interesting offset to this positive risk drive was the biggest drop in the benchmark, 10-year UK government bond yield since September 26. Furthermore, BoE member Bean remarked that the group should still consider further stimulus even if its effectiveness was waning.

Japanese Yen Falters as Risk Trends Tentatively Offset Fresh Stimulus Worries
Have Japanese policy officials eased up on the rhetoric of driving their currency lower? Exactly the opposite – the have continued to escalate their threats. Yet, their efforts weren’t giving the currency its selling push this past these past few weeks. This past session, the positive risk sentiment roused the broader market to feed carry rather than forcibly drive capital away from the yen.

Gold Suffers Second Biggest Daily Drop in Five Months Despite Dollar Slip
There was ambiguity this past session as to whether individual currencies / assets were strong or sentiment trends were taking serious root. There was little doubt that gold was uniquely selling off Wednesday though. The metal posted its second biggest daily decline in five months – 22.4 points or 1.3 percent. The slow steps on the Fiscal Cliff may have provided; but just like risk, gold selling needs more to continue.

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