Talking Points:

Dollar Suffers Critical Breakdown but Do Fundamentals Validate?
Euro Climbs as Investor Survey Surges, Italy Vote Uncertain
Japanese Yen Crosses Rally after Nikkei 225 Break Higher

Dollar Suffers Critical Breakdown but Do Fundamentals Validate?
The US dollar suffered a potentially serious blow to start this week. The greenback broke down against most counterparts in the opening session while the Dow Jones FXCM Dollar Index closed below a trendline that has guided the benchmark higher throughout 2013. A simplistic technical read of the situation suggests that we have witnessed a meaningful first step towards a bigger trend shift. However, the need for fundamentals to feed follow through on this new bear trend are even greater now – under current market circumstances – than they would be during ‘normal’ conditions. Trend is found not on the ‘break’ but rather in the follow through. With that said, fostering a sustained dollar selloff whether on standard risk appetite trends or anti-Taper considerations is unlikely with the pivotal September FOMC meeting due next Wednesday.

In an assessment of general market conditions, it is clear that there are significant headwinds for meaningful trend generation. From a price action perspective, we have seen both the S&P 500 and majors entrenched in congestion patterns over the past two months. Meanwhile, positioning reflects a 15-year low in participation (weekly equity volume), record levels of borrowed capital for leveraged trade and a net speculative futures exposure via the Commitment of Traders report extending its drop in longs. Before, the fundamental curb to developing the dollar selloff was an open-ended argument between distant risks or day-to-day event risk. Now, with the Taper countdown ticking down to its final days, there is something far more tangible preventing positioning for medium-term risk exposure.

With the US central bank – the world’s most prolific external support system – set to throttle back its support, it will be extraordinarily difficult to encourage heavy capital allocation to ‘risky’ assets just before the policy meeting. As confidence in the ‘Bernanke Put’ fades, volatility as a measure of uncertainty and insurance costs will rise and offset that otherwise meager returns the market currently offers. Thereby, the greatest hope for an extended dollar slide rests with a deleveraging of the Taper premium that the dollar has used to advance alongside equities. Yet, to meaningfully position against the Fed downshift with so many unknowns (time, pace, etc), that too is a dubious proposition.

Euro Climbs as Investor Survey Surges, Italy Vote Uncertain
EURUSD offered up biggest rally three weeks. And while this benchmark ‘major’ certainly found its contribution from the dollar slip, the market-wide gains from the FX market’s second most liquid currency spoke to an inherent performance. From the docket, the headline-friendly release was the September Sentix investor confidence survey for the Eurozone. The indicator delivered a surprise positive reading (6.5) which was the highest level for the series since May 2011. This is an encouraging read against the backdrop of Greece, Cyprus, Italy and other uncertainties. Meanwhile, the Italian Senate’s debate on whether to expel PDL party leader Silvio Berlusconi for a tax fraud conviction passed a first day without a conclusion. The group will deliberate again Tuesday at 18:00 GMT with a PDL ally threatening to bring down Italy’s coalition government without a potentially months-long delay for an appeal. Another event to watch will be the medium-term EFSF bond auction.

Japanese Yen Crosses Rally after Nikkei 225 Break Higher
Though USDJPY was relatively choppy through the opening session owing to the dive from the US dollar, the yen crosses managed universal gains. The favored carry currency Japanese yen gapped lower on the open (the crosses gapped higher) on the Asian session open with the support of a significant surge from the local Nikkei 225 that carried it above 14,000 and a limiting congestion top. The fundamental heft for this move was questionable. The revision for the 2Q annualized GDP figure (3.8 percent) was significantly better than the initial reading, but it was slightly below the consensus – a consensus investors would theoretically adjust to ahead of time. Meanwhile the BoP trade balance for July posted its third largest deficit on record. With key crosses like AUDJPY, EURJPY and USDJPY at resistance; continuation falls to risk trends.

Australian Dollar Gains Little Ground after Election, Despite Equities ClimbWith a rise in global equities, climb in carry trade and positive S&P/ASX response to Tony Abbott’s Liberal-National Coalition win in the Australian federal elections, it wouldn’t to a stretch to presume that the tentative bullish reversal from AUDUSD this past Friday would find a wave of momentum to ride Monday. However, that Aussie dollar strength has yet to materialize. From the calendar, there was only modest Aussie data and Chinese trade numbers supported growth and thereby demand for Aussie goods. The AUD’s restraint is reason for concern.

British Pound: Cable Clears 1.5650 as Osborne Backs BoE’s Forward Guidance
GBPUSD cleared noteworthy resistance at 1.5650 to open the week. The question is whether this is sterling strength that can be capitalized to generate follow through for the cable and other pound crosses or not. First and foremost, the pounds only prominent movement was isolated to the cable and GBPJPY. Outside of these risk sensitive pairs, the currency did very little. For fundamentals, Chancellor of the Exchequer voiced his support for the BoE’s forward guidance and the RICS House Price balance hit a November 2006. Yet neither factor carries much weight.

US Oil Slips Back Below $110 as Syria Pressures Settle, COT Positioning Drops
Tensions between Syria and the West have cooled, and the threat downgrade has pulled US-based WTI crude back below the $110 mark. Russia has moved to broker a deal to prevent a US-led attack on Syria’s Government on claims that the chemical weapons were used against their own citizens. US President Obama seemed receptive to a suggestion that Syria will hand over its stock of chemical weapons. In other news, speculative futures positioning dropped a fifth consecutive week from record highs through last Tuesday according to COT figures.

Gold Slides Alongside the US Dollar
Typically, we expect the dollar and gold to move in opposite direction. That wasn’t the case through Monday’s session. The metal eased 0.4 percent through the opening session even as the greenback threatened a provocative technical slip. For scale, the commodity’s slide was small relatively to Friday’s rally and volume behind the move was the lightest we’ve seen in a month. This is yet another piece of evidence that the dollar’s move Monday doesn’t speak to a certain bear trend. Or, more specifically, there isn’t yet a material effort to unwinding premium in a Fed Taper – which would loosely bolster the commodity. On an side note, ETF gold holdings dropped 0.15 percent –the most in a month.

**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

Consumer Inflation Expectation (SEP)

2.3%

Business confidence has been negative since March in Australia.

1:30

AUD

NAB Business Conditions (AUG)

-7

1:30

AUD

NAB Business Confidence (AUG)

-3

5:30

CNY

Retail Sales (YTD) (YoY)

12.9%

12.8%

Although retail sales YoY look to come in at over 13%, the past few prints are in line with growth levels from 2003 and 2004.