Press Release: Dollar Suffers First Drop in Five Days, Bears Ready to Run on NFPs

The broader market started to reverse some of the divergence from underlying risk trends experienced through first half of the week. And, given the persistent bias of US equity benchmarks in this low conviction setting along with the Euro’s strong reaction to the ECB policy decision; the revived correlations worked against the dollar.

• Dollar Suffers First Drop in Five Days, Bears Ready to Run on NFPs
• Japanese Yen in Holding Pattern Below 79.00 after BoJ Hold
• Euro Rally Above 1.3000 Groundless on Growing Greece, Spain Issues
• British Pound Follows in Euro’s Wake, Returns to 1.6200
• Canadian Dollar May Overtake 0.9900 Yet if Loonie Jobs Data Falters
• Oil Posts an Incredible 4.1 Percent Rally to Offset 4.1 Percent Drop
• Gold Gains Finally Stick but Yet to Break 1800

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Dollar Suffers First Drop in Five Days, Bears Ready to Run on NFPs

The broader market started to reverse some of the divergence from underlying risk trends experienced through first half of the week. And, given the persistent bias of US equity benchmarks in this low conviction setting along with the Euro’s strong reaction to the ECB policy decision; the revived correlations worked against the dollar. The greenback posted losses against every one of major counterparts this past session while the Dow Jones FXCM Dollar Index (ticker = USDollar) posted its first decline in five trading days – also the biggest daily drop in three weeks.

While the return of a risk-defined market theme hasn’t initially proven favorable for the dollar, it is nevertheless a welcome sight for fundamental traders. To generate a lasting and market-wide trend, we need a catalyst that can tap into systemic capital movement. Trying to jumpstart a meaningful trend without something as broad-based as investor sentiment to support it usually leaves us with stalled trends, false breakouts and quick retracements. With equities, speculative commodities and FX carry interest all moving in step again; we have the foundation for trend development. Yet, where the initial move through this reconvening is ‘risk positive’, fundamentals suggest the greater potential is bearish.

There are many ways to evaluate the medium to long-term fundamental outlook, but many of the most significant factors speak to an over-extended positioning in risky assets. Stressed economic data, fading growth outlooks from important policy bodies (like the Fed and IMF), near-record low yields and suspiciously low levels of projected risk (just off five year lows according to the FX volatility index) create exceptional tension against multi-year highs in US equity benchmarks. As John Maynard Keynes said, the market’s can remain irrational longer than we can remain solvent, but eventually an equilibrium will be found. This balance promises to come faster as the headlines turn increasingly bleak and policy officials have made reached the end of their policy rope. That leads us into the September NFPs. This indicator has proven itself hit-or-miss over the months. Market participants recognize the bigger trend behind labor markets, and a single month change won’t alter that course. However, considering we are unlikely to see a serious policy upgrade beyond the open-ended QE3 and the stimulus-backed markets are just off highs, the bears can carry more influence after the release. Of course, we need a ‘bearish’ outcome to trigger the move…

Japanese Yen in Holding Pattern Below 79.00 after BoJ Hold

There was little chance that the Bank of Japan altered its monetary policy mix at its meeting this morning. The policy authority indeed announced that they had kept their asset purchase fund (55 trillion yen) and credit-loan program (25 trillion yen) at their current; but they had also spelled out a more disconcerting future. The second downgrade to the economic outlook in so many months gives a little more weight to the suggestion warning that the group is monitoring the distortion to its economy caused by the high currency. With both the new Finance and Economy ministers demanding the BoJ to do more (buy foreign bonds) and the latter official sitting in on central bank policy meetings, the likelihood that the stimulus effort is augmented is considerably greater. If the BoJ moves at its next meet (October 30), it may finally deal a hit to the yen.

Euro Rally Above 1.3000 Groundless on Growing Greece, Spain Issues

The direct contrast to the dollar, the euro climbed against all its major pairings Thursday. For those keeping score, that is a five-day consecutive advance for the currency against the pound, yen and Australian dollar. From a fundamental perspective, this advance is highly suspect; and doubt certainly hit a peak this past session. The top billed event was the ECB rate decision, but the group (as expected) didn’t take any additional steps after announcing the OMT bond purchase program at the last meeting. Notable from President Draghi’s press conference, the policy official said explicitly that the bank would not offer Greece better terms on its loans. The IMF offered similar sentiments recently when it was said aid payment wouldn’t be made if Greece’s debt didn’t look sustainable or other efforts were made to fill the aid gap. The tension is just as high for Spain. EU officials reportedly voiced doubt over the 2013 budget viability while the Finance Minister said a bailout was unnecessary.

British Pound Follows in Euro’s Wake, Returns to 1.6200

As usual, a decision by the BoE to hold its benchmark rate and bond purchase program unchanged warranted no in-depth remarks from the group. That said, the MPC made it know that they were keeping the scale of the QE program under review. That will be important to remember next month as the latest round of 50 billion sterling in gilt purchases is completed through November. It is difficult to gauge whether the sterling and UK economy has truly benefited from the BoE’s efforts to this point; but with the economy sliding faster, we will see more evidence.

Canadian Dollar May Overtake 0.9900 Yet if Loonie Jobs Data Falters

With the dollar’s weakness and risk appetite push this past session, USDCAD managed to retreat from its one-month highs just short of 0.9900. Though Thusday’s drop was the biggest selloff for this pair in three weeks, it may not be too difficult to push USDCAD back up to its highs and perhaps even beyond the round figure. Should the Canadian employment data disappoint alongside a weak NFP reading, a rally would ensue.

Oil Posts an Incredible 4.1 Percent Rally to Offset 4.1 Percent Drop

Wednesday, US oil marked an increase 4.1 percent tumble – the second largest this year – against the news that attacks were taking place over the Syria – Turkey border. Fundamentals seemed to kick back in Thursday however as soon as risk trends kicked back in with oil retracing all of its losses. Oddly enough the CBOE oil volatility index has hardly moved. Activity is likely to die down unless a serious risk trend takes off.

Gold Gains Finally Stick but Yet to Break 1800

Over the past three weeks, gold has made a number of attempts to edge closer towards 1800, but each effort was quickly retraced well short of the market. Without a hope for a significant escalation of global stimulus (the Fed and ECB already optioned open-ended programs and the BoJ just held), the alternative store of wealth play needs fuel from another source. How about dollar weakness? With the dollar falling this past session, the metal has closed at its highest level since November of last year. A further tumble for the greenback could push 1800.

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— Written by: John Kicklighter, Senior Currency Strategist for DailyFX.com

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