• Dollar Approaches Monthly High but Follow Through will be a Struggle

  • Euro Weathers 3Q GDP Figures but Financial Troubles Making Up for It

  • British Pound Traders Should Watch the BoE Quarterly Inflation Report Closely

  • Japanese Yen: Will the Bank of Japan Attempt to Shift the Yen at its Rate Decision?

  • Australian Dollar Bulls Can’t Hold onto RBA Optimism from Minutes

  • Canadian Dollar Sliding Towards Critical Boundary with US Dollar as Risk Drops

  • Gold Refuses to Play the Role of Straightforward Safe Haven

Dollar Approaches Monthly High but Follow Through will be a Struggle
Risk aversion was the name of the game through much of Tuesday’s session; but a sharp correction in sentiment measured through equities in the second half of the session seemed to put demand for a safe haven on ice. Yet, through this swing in speculative interest; the dollar seemed to hold a remarkably consistent (albeit tame) advance. Now, heading into new trading day, we find the risk aversion switch once again flipped. Equity futures are pulling back; but the progress being made does little to incite the threat of new, robust bear trends. Alternatively, we find the US Dollar Index pushing above 9,850 to mark highs last seen a month ago. This is a noteworthy divergence in risk-sensitive markets that have otherwise moved more-or-less in lockstep over recent weeks. What does this mean? Is this a permanent divergence? Could there be a major fundamental trend shift in the works?

To appreciate the connection between equity and FX markets in risk appetite, it is worth noting that the 20-day correlation between EURUSD and the S&P 500 through the beginning of this month was 98 percent. That is a remarkable. However, up to today, that relationship has dropped to 49 percent – a dramatic divergence which we can certainly see evidence of in this morning’s price action. In general, the two market’s broad trends are the same; but the smaller corrections are not running at the same time or pace. The foundation of this disparity is most likely a lack of true momentum – both fundamentally and technically. For technical traders, it isn’t difficult to spot the congestion (directionless chop) on the benchmark US equity index since the beginning of the month. EURUSD on the other hand is finding a little more progress in its decline (thanks to intrinsic fundamental issues in Europe, which we will discuss in more detail below) but is still failing to secure a trend akin to late August.

The fundamental implications are that there simply isn’t a strong enough drive in underlying sentiment to maintain cross-market correlations through market-wide capital flow. In other words, there isn’t enough fear to encourage the wholesale scramble to safety. That said, it is surprising that the dollar (typically a liquidity provider during deteriorating financial conditions) should lead the drive. The reference to data (advanced retail sales and factory-level inflation) or central bank speak doesn’t hold the necessary influence to fill the gap here. Divergences like these do not last for long; so unless risk aversion commits to the risk aversion drive, the greenback’s rally could sputter. Looking for catalysts to stoke fear; there is little that can carry the overall market. And so, we will keep a close watch on the performance between EURUSD and S&P 500 futures.

Euro Weathers 3Q GDP Figures but Financial Troubles Making Up for It
The third quarter GDP figures that printed Tuesday were an opportunity for market participants to see exactly what kind of impact the burgeoning financial crisis is having on the Euro-region. However, instead of optimists finding a harsh dose of reality in freezing credit markets and strong austerity; the masses were able to cling onto their temporary hope and fall back on complacency as France recorded 0.4 percent expansion and Germany grew 0.5 percent. As the core continues to hold out from the financial contagion, there is still room for the ardent bulls to hang onto the belief that the Euro Zone will be able to stabilize its crisis and return to strong form. However, reality is better reflected in the Spanish bond auction of the past session. Like the painful Italian bond auction on Monday, Spain paid sharply higher yields to raise funds in 12 and 18-month bond auctions. In the upcoming session, Portugal will be the next litmus test. In financial strain, we see the real future of capital flow.

British Pound Traders Should Watch the BoE Quarterly Inflation Report Closely
The British pound made a remarkable came under remarkable pressure through this past session – dropping below critical 1.5850 against the dollar and even losing ground against high yielding currencies in the second half of the day. Despite BoE Governor King’s confidence that inflation will drop aggressively; CPI is still running at 5.0 percent and creating trouble with an economic slowdown. With King’s view, the MPC’s push for bond purchases and warnings of possible recession; we now look ahead to a likely dovish BoE Quarterly Inflation report.

Japanese Yen: Will the Bank of Japan Attempt to Shift the Yen at its Rate Decision?
Sometime in the coming hours, the Bank of Japan is scheduled to announce its monetary policy decisions for this month. It is unlikely that the group changes stimulus programs (much less official rates); but there is a lingering threat that economic strain, political pressure and the USDJPY’s retracement of post-Ministry of Finance intervention will force the BoJ into action. Simply yen selling won’t do. They need creativity.

Australian Dollar Bulls Can’t Hold onto RBA Optimism from Minutes
Tuesday morning, the Australian dollar caught a notable bid after the market learned from the RBA minutes that there was an argument to be made in holding the nation’s benchmark rate. However, rates were cut; and the market is fully pricing in another 25bp drop next month. It’s hard to take an optimistic view on a clearly bearish/dovish event when risk aversion is redefining the Aussie dollar’s bearings.

Canadian Dollar Sliding Towards Critical Boundary with US Dollar as Risk Drops
USDCAD is temping a month-long range top at 1.0260 as risk aversion undermines investment currencies (a group that the loonie certainly fits into). There was modest event risk this past session and we have more through the second half of this week; but the data likely carries little influence in these markets. What truly matters with this pair is that we are specifically highlighting liquidity.

Gold Refuses to Play the Role of Straightforward Safe Haven
Looking at the S&P 500 and Gold daily charts side-by-side, we see something remarkable – a positive correlation. One is a renowned risk appetite barometer and the other a favored safe haven; and yet they are moving in the same direction. This is another example of what can happen when strong and persistence shifts in fundamental expectations and sentiment dissipate. If the dollar continues to gain, both will lose.


ECONOMIC DATA

Economic Data

Economic Data

Economic Data

Economic Data


SUPPORT AND RESISTANCE LEVELS

Support And Resistance

Support And Resistance