• Dollar Retraced Three-Quarter of October Losses, But a Real Trend?

  • Euro: While Officials Vow More Action, Credit Conditions Continue Deterioration

  • British Pound Weighed by Press for Austerity, Limit BoE Minute Expectations

  • Canadian Dollar Sides with Risk Rather than Retail Sales Data

  • Australian Dollar Drives New Lows after Chinese Factory Activity Drops

  • Japanese Yen: The Strategy of Intervention in Liquidity Lull

  • Gold Climbs as European Credit Conditions Deteriorate, Stimulus Winds Pick Up

Dollar Retraced Three-Quarter of October Losses, But a Real Trend?
Fundamental gravity is proving to be burdensome for the speculative side of the markets – but that same weight is certainly helping out the safe haven dollar. As equities, commodities and high yield currencies extend their drop into the new trading session; we find the Dow Jones FXCM Dollar Index nudging ever closer to the 10,000 market and setting fresh six-week highs along the way. Yet, despite the consistency in this trend and the greenback’s proximity to such a prominent level; it will be exceptionally difficult to keep this drive up. The issue is not the fundamental backdrop – on that front, the need to unwind leveraged speculative positions seems to rise on a weekly basis. Rather, the issue now is the participation. Heading into Wednesday’s trading session, market participants are already downshifting as liquidity starts to taper off. This begins with closed Japanese markets today and the US Thanksgiving holiday tomorrow.

Tempering speculative activity does not necessarily reverse broader trends; but it can certainly lead to short-term pullbacks. The issue here is that when traders are looking at which positions to offset; it is often the short-term exposure – which is invariably related to the most recent trends. This time around, that prevailing trend is an aggressive risk-aversion drive which will certainly a healthy segment looking to book profit or balance the books before they take off. Whether this is a meaningful correction or merely a consolidation period for the market to pick back up when the masses return depends on the health of the global financial and credit markets. In previous years, this wasn’t an issue; but that is certainly a concern now. Particularly, the spread of the European financial crisis could encourage an outflow of capital from the one of the largest economies in the world and into the safe haven dollar.

In the meantime, we have a few fundamental developments State-side that deserve our attention. The downward revision in the 3Q GDP figures (to 2.0 percent) isn’t particularly market-moving; but the FOMC minutes would carry a little more influence. The general layout of the statement was little changed; but short-term stimulus hawks are happy to see the minority is calling for further easing against the concerns of significant downside risks to the economic economy. Much more interesting, though, was the announcement that the Fed was beginning its Stress Tests with six of the largest US banks under a stress scenario akin to the second half of 2008 with European troubles added to the mix. Results are a ways off; but there is little chance this will not lead to banks raising capital or a highly skeptical market.

Euro: While Officials Vow More Action, Credit Conditions Continue Deterioration
On the surface, the euro looks like it is stabilizing – reclaiming its composure after repeated financial shocks have undermined its long-term stability. However, when we look beyond the currency’s speculative bearings; we find credit markets are bearing the brunt of growing fear that the financial crisis will permanently alter the region and its currency. For headlines this past session, the seemed to be a temporary sense of relief after the IMF reported expansion of lending facilities. The Flexible and Precautionary Credit Lines are not ultimate solutions; and the limited market response shows the market knows that. The PCL is most promising as it could offer support before a crisis sets for six months to two years of up to five times the contribution an IMF member contributes. In the meantime, we note that ECB short-term bank liquidity demand hit a mid-2009 high and Fitch has US money market funds cutting EU bank exposure by 42 percent from March. Furthermore, we find the Italian 2-10 yield spread has flipped (a sign of extraordinary strain) while a extremely pained bond auction continues to hammer Spanish debt.

British Pound Weighed by Press for Austerity, Limit BoE Minute Expectations
Alongside public sector net balance figures that showed a modestly lower-than-expected 3.4 billion sterling report; Prime Minister David Cameron conceded that it was growing increasingly difficult to cut the deficit as the growth outlook deteriorated. Nevertheless, the policymaker promised to push ahead and the volatile mix of economic contraction and BoE stimulus seems increasingly cemented. Looking ahead to this upcoming session, we have the BoE minutes on tap; but we shouldn’t expect more than what was covered in the Quarterly Inflation Report.

Canadian Dollar Sides with Risk Rather than Retail Sales Data
As expected, the Canadian retail sales data carried didn’t carry enough impact to distract the loonie from its deeper fundamental moorings. With risk trends and oil prices sliding; there was little reason for the loonie to fight the anti-risk flows. In the upcoming session, we will watch to see what BoC Governor Carney says about the economy; but if sentiment trends can’t get the currency moving, we won’t expect commentary will.

Australian Dollar Drives New Lows after Chinese Factory Activity Drops
Clearly, with risk trends under constant pressure and without relief from the dovish rate forecast; the Australian dollar won’t be able to find buoyancy. Heading into the new trading session; the fundamental current deepened with an HSBC Chinese factory activity indicator diving below the 50 market and hitting a low not seen since March of 2009. The financial and economic strain is spreading to Australia’s key export market.

Japanese Yen: The Strategy of Intervention in Liquidity Lull
Nearly every conversation about the Japanese yen will inevitably include a discussion of intervention. We should consider the strategic advantages and disadvantages of intervention during a liquidity slump – because the BoJ and MoF will. There would certainly be a heavier impact in the quiet period; but follow through dry up faster than normal without speculators around. The probability of manipulation is low.

Gold Climbs as European Credit Conditions Deteriorate, Stimulus Winds Pick Up
Looking to volume figures, we note that gold futures are finding weakening interest commensurate with the equities market slowdown. An interesting contrast: ETF holdings of the metal continue to surge to record highs. What matters for commodity traders now though is the instability in financial and credit markets – disrupted enough to seek an alternative store of wealth; but not so much to raise need for cash.


ECONOMIC DATA

Economic Data
Economic Data
Economic Data


SUPPORT AND RESISTANCE LEVELS

Support And Resistance
Support And Resistance