Forex: Dollar Unchanged Against Euro as Volatility Collapses

Dollar Unchanged against Euro as Volatility Collapses
Japanese Yen Gaps Lower after Election Threatens Stimulus
Euro Post-Greece Support Rally Already Sputtering
British Pound Enjoys Broad Gain as BoE Reflects on Funds for Lending Success
New Zealand Dollar Severely Overbought, but English’s Warnings Lack Impact
Australian Dollar Writes off Leading Indicator Improvement, RBA Minutes
Gold Volatility Hits Series Low, Futures Volume Tumbles

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Dollar Unchanged against Euro as Volatility Collapses
The dollar was a mixed bag Monday as various catalysts conflicted with a confused risk appetite bias. From the Dow Jones FXCM Dollar Index (ticker = USDollar), a modest gain was won over Friday’s close; but the technical gain hardly generated any meaningful progress for the benchmark. From the market’s most liquid pairing, EURUSD, the day’s performance was a symbolic 1-pip gain. Furthermore, the range on the pair was a meager 46 pips. That is the smallest daily range since November 12 (ignoring the post-Thanksgiving Friday) and overall the third slowest trading day this year. Such inactivity is not necessarily unusual for the time of year and expectations for volatility and volume heading into the holiday period. On the other hand, such lethargy following the aggressive rally of the past weeks puts the markets in a precarious position where a natural correction without distinct fundamental buttressing looks more and more likely.

We know that the dollar’s primary role in the FX market is as an ultimate safe haven – bid when traders are scrambling for ‘safety at any cost’. Through Monday, however, the standard measures of risk appetite had both surged. The moral hazard-based S&P 500 index rallied 1.2 percent – the most in three weeks, though it has yet to progress its bullish ambitions above 1435. A more fundamental view of risk, the Risk-Reward Index rallied to its highest level since July 2011 – the collective rise in global government bond yields and fresh five-year low in the FX Volatility Index (6.91 percent) backing brazen speculative interests in these thin trading conditions. Following the standard lines of fundamental developments, a swell in volatility (as a measure of fear) is the most prominent ‘hope’ for a dollar rally.

Yet, we are heading into the year-end trading period when speculative positioning is squared and a considerable portion of the market waits it out until 2013. Furthermore, the last, loose thread for a serious speculative drive is the US Fiscal Cliff. That is more likely to end with a deal than to trigger automatic spending cuts and tax hikes and thereby push the US economy into recession. That said, the dollar may yet still see an advanced. If there is a correction on profit taking to positioning of the past weeks, that would more likely be a dollar-positive positioning effort.

Japanese Yen Gaps Lower after Election Threatens Stimulus
FX traders clearly believe that a structural change in Japan’s financial and economic bearings is underway. We have seen a serious tumble from the Japanese yen over the past four-to-five months that has driven the currency to multi-month and multi-year lows against various pairs. Part of this climb was on the back of standard risk appetite trends – which continue to advance on their own. Yet, with rates hovering near all-time lows, interest in collecting tepid yields on already richly-priced markets would find limited interest until it was clear that a longer-term, structural bull phase was underway. That isn’t the kind of trend that you see in the normally quiet period at the end of the calendar year. The more robust element behind yen selling is the growing threat from Japan’s economy and markets.

The yen crosses produced onc of the biggest gaps that I have seen in a long time with Monday’s open. The catalyst was the news that the LDP party won the weekend’s election and afforded the group a super-majority (two-thirds) in the Lower Parliament with New Komeito. This may finally allow to the government to push through serious reforms that were until now blocked. As significant as this count was, though, it was heavily expected and priced in ahead of time. To keep the yen on its back foot, new Prime Minister Abe has to hit the ground running with stimulus efforts to drive the currency down. That is a tall order for the very immediate future, and the markets have priced in a lot…

Euro Post-Greece Support Rally Already Sputtering
The euro was set adrift against most of its counterparts Monday – allowing stronger or weaker counterparts to define the bearing and momentum of the pair. This disengagement from its fundamental push is concerning for structural bulls. If the Greek aid payment (€34.3 billion was reportedly paid this past session) indeed buys the Euro-region time, bulls’ opportunity to buy into cheap assets would be now. That is, if Greece was the only concern. Both Merkel and Draghi have urged caution. That is good advice, and Ireland’s upcoming 3Q GDP will remind us why.

British Pound Enjoys Broad Gain as BoE Reflects on Funds for Lending Success
The sterling gained against all but the Canadian dollar through Monday’s session. This consistent strength managed something that the dollar, Euro and even high-yield currencies couldn’t. Where was this restrained but permeating bullishness coming from? The Financial Bulletin from the BoE reported early signs of the Funds for Lending scheme paying off while 10-year gilt yields rallied for a seventh straight day.

New Zealand Dollar Severely Overbought, but English’s Warnings Lack Impact
There is little doubting the kiwi is overbought in the near-term. Aside from the technical indicators, we can look at the rather stable fundamental backdrop that has provided little fundamental support for the drive (especially against fellow, investment currencies). Despite this dubious valuation though, the kiwi seems to shrug off Finance Minister English’s concerns about the high currency and view for low rates through 2013.

Australian Dollar Writes off Leading Indicator Improvement, RBA Minutes
A mixed fundamental docket for the Australian dollar would do little for the currency’s progress Monday – bullish or bearish. For data, the Conference Board’s Leading Index (a proxy for GDP, but questionable one) printed a notable pickup. Offsetting that, the RBA minutes showed the foundation for a possible follow up rate cut in the first quarter of next year. The Aussie dollar needs true risk trends to start moving again.

Gold Volatility Hits Series Low, Futures Volume Tumbles
Technical traders will noticed that gold has worked its way into a congestion pattern, and the year-end liquidity drain threatens to solidify the lackluster range. Looking at trading conditions behind the metal, we find that the CBOE’s gold volatility index closed at the lowest ever seen for the series while futures volume has dropped to lethargic levels (91,321). It is exceptionally difficult to produce breakouts in these conditions.

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