DailyFX | February 1 2013 11:56 EST
When we look to the equally-weighted Dow Jones FXCM Dollar Index (ticker = USDollar), we find a currency that marked an incredible drive through the end of this past week to close a six-month high just below 10,200. Yet, we see something very different in the EURUSD chart.
Dollar’s Strength Marred by EUR/USD Climb to 14 Month High
When we look to the equally-weighted Dow Jones FXCM Dollar Index (ticker = USDollar), we find a currency that marked an incredible drive through the end of this past week to close a six-month high just below 10,200. Yet, we see something very different in the EURUSD chart. This benchmark currency pairing finds the greenback in its weakest position in 14 months. And, this isn’t just a technical drive. There is sound fundamental support to this move. So, how are we to assess the dollar? Is its primary pairing the key reflection of its weakness, or does its relative strength against the Japanese yen and British pound count as a bearing of individual strength?
Assessing the reserve currency’s strength through the past week, we find it’s only gains came against the especially troubled yen and pound along with a mild advance against the Australian dollar. Everything in the financial markets is relative – but nowhere is it more prominent than in the FX market. Given its balance of power, the dollar is in fact under significant pressure. As well it should be. There are three, key fundamental fronts on which currencies can compete under current themes: position in risk trends; relative stimulus; and prospects for economic strength. As an extreme safe haven, there is more a reason to avoid the dollar. No other global policy authority is currently outpacing the Fed’s mammoth $85 billon-per-month easing effort. And, the economic advantage the US, Fed and IMF forecasted for the United States has been undermined by this past week’s surprise 4Q GDP contraction (-0.1 percent). Its bearings do not look too encouraging.
Just as the dollar’s fall has come in opposition to its counterparts’ strength, the best chance for the currency to recover is to see its surrounding circumstances change. As always, the most menacing threat of volatility and systemic shift for the global financial markets – and therefore the best hope of the safe haven dollar – is a consequential shift in investor sentiment. We have seen US equity indexes (S&P 500 and Dow Jones Industrial Average) scale five-year highs this past week and carry traded exposure leveraged by a weak yen at the same time volume dries up, leading edge markets start to turn lower (junk bond funds) and plunge protection falls dangerously low. However, the dollar’s position on the risk scale isn’t the only thing it can look to for possible gains. There is also the distinct possibility that its most prominent counterparts (most importantly the euro) can face their own hardships. If, for example, the euro were to see its appeal as a non-combatant in the global currency war fall apart; the sudden rebalancing would be a significant benefit for the dollar.
Euro Overpowers its Counterparts on Stimulus, ECB Ahead
The euro was without doubt the strongest of the majors this past week – both technically and fundamentally. For a market that is primarily focusing on the influence of stimulus efforts on yields and money supply, the Eurozone is heads and shoulders above the competition. That strong position was furthered through the final session of this past week when the fear that the large take on the early Long-Term Refinancing Operation (LTRO) repayments could hurt the region’s liquidity position was tempered when the European Central Bank (ECB) announced only 27 banks would be repaying a modest €3.5 billion in the week ahead. We have moved seamlessly from the reduction of tail risk, to the reduction of stimulus – and the rise in yields it carries with it. However, the euro isn’t free and clear. A significant change in risk tides can quickly leverage the lasting uncertainties behind the Eurozone’s economic and financial future and downplay the modest yield advantage. Also, there is a chance that the ECB may respond to hasty reduction of liquidity from the banking system by responding to easing inflation and recession with easing…
Japanese Yen Extends its Record-Breaking USD/JPY Rally to 12 WeeksNot long ago, the USDJPY matched its record 10-week consecutive rally. With the close of this past week, the tally is now up to 12; and the assessment of the pair (and all the yen crosses) is ever more extreme. However, we should not mistake a situation where fundamentals and pricing are enormously divergent with an unfounded belief that it must rebalance immediately. Extremes exist and they do balloon. As with EURUSD, the greatest risk to the yen’s tumble is crack of fear spreading across the market. That or realization that the BoJ isn’t actually easing.
Australian Dollar: Should Traders Expect Any Change from the RBA?
The Australian and New Zealand dollars were on considerably divergent paths this past week. While the former still commands the bigger economy and higher benchmark yield, the kiwi is showing a better bearing for investment trends moving forward. Perhaps the Aussie docket can change that trend moving forward. Top of the list next week, we have the Reserve Bank of Australia’s (RBA) decision. No change is expected, but the market’s remain on edge that further cuts will come in the first half. Aside from that we have retail sales, trade and housing data.
Canadian Dollar Faces Volatility Mines in Coming Week
The Canadian dollar’s low yield and its direct fundamental ties to the US dollar ensure that USDCAD doesn’t move too far. We could possible see a serious shift in the pairs bearing if say there were an overwhelming demand for Treasuries. However that seems unlikely. That means we should be looking for shorter-term moves instead. And that is a good policy with manufacturing, housing, trade and jobs data scheduled.
British Pound: Don’t Write Off the BoE
Through Friday’s session, there was a drop in the Manufacturing activity survey that seems to give the sterling a little shake. However, the serious downdraft came well after the data reported with EURGBP surging over 100 pips and GBPUSD plunging an additional 175 pips. There is a building concern that officials realize the UK isn’t doing enough to stabilize between fiscal and monetary policy. Will the BoE respond?
Gold: Fed Stimulus Is Priced In, Bulls Need More Fundamental Power
Gold bulls are already well aware that the Federal Reserve will be building its balance sheet with a steady diet of $85 billion in Treasuries and MBS through the foreseeable future (thereby devaluing the greenback). If this were not priced in, we would be above $1,800. We need another catalyst. Perhaps the greatest surprise quotient would be a dovish turn from the ECB – the stimulus withdrawal poster child.
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Halifax Plc House Prices s.a. (MoM)
Measure of change in home prices, Large swings in data set
Halifax House Price (3MoY)
Has not reached positive territory since 10/10, 5-yr. avg. of -1.5%
Lloyds Business Barometer
Steady climb from 1 yr. low of -21% on 5/31
Building Approvals (MoM)
Highly volatile, 5-yr. avg. of 0.4% with -20.4% and 29.3% range
Building Approvals (YoY)
Highly volatile, 5 yr. peak of 61% growth on 1/10, avg. of 0.5%
ANZ Commodity Price
Positive since 8/12, following 6 months of negative growth
ANZ Job Advertisements (MoM)
Negative growth 19 of last 24 months, decline since 1/12
UBS Real Estate Bubble Index
Steady 5 yr. increase, low of -0.81 to 1.02 high, indicates RE bubble
Euro-Zone Sentix Investor Confidence
Has not been positive since 5.3 rating on 6/11
Purchasing Manager Index Construction
Floated between 45-55 since climb from 5 yr. low of 27.8 on 2/09
Euro-Zone Producer Price Index (MoM)
Has not risen to 1.5% or above over last 5 years, avg. 0.2%
Euro-Zone Producer Price Index (YoY)
Positive since 3/10, 2-yr. decline from 6.8% high
Large swings in data set around 5-yr. mean of 0.2%
Labor Cost Private Sector (QoQ)
Steady growth between 0.3% and 0.5% over last 12 quarters
Average Hourly Earnings (QoQ)
Positive growth since 6/10 with avg. of 0.8%
Private Wages ex Overtime (QoQ)
Growth highly correlated with total labor cost, 5-yr/3yr. avg. of 0.5%
AiG Performance of Service Index
3 yr. low of 39.6, high of 52.3, avg. 47.4
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--- Written by: John Kicklighter, Chief Strategist for DailyFX.com
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