FOREX: Dollar Rally Fortified by Crucial Reversal in S&P 500, Risk Appetite

Dollar Rally Fortified by Crucial Reversal in S&P 500, Risk Appetite

For the dollar, the critical technical breakout happened Monday. To start the week, the trade-weighted Dollar Index overtook a month-long range top; while the FX market’s most liquid currency (EURUSD) put in for a confirmation of this past Friday’s lows. However, for gauging conviction and trend, Tuesday’s price action was far more significant for validating a singular outlook across the market. From a purely price action standpoint, the session would lead the Dollar Index to a necessary break of resistance that was rendered meaningful by the confluence of a prominent trendline, Fibonacci retracement and 50-day simple moving average. And, in the meantime, it would mark a fresh seven-week high. From the liquid majors, we would finally see participation in the dollar rally that extended beyond the early reversal patterns from EURUSD and USDJPY. GBPUSD finally dropped below 1.5950, USDCHF has moved up to a near-two-month high just below parity, USDCAD surged higher and AUDUSD fell for the sixth time in seven active trading days. Though, all of this taken into account, the most meaningful development for the dollar was the S&P 500’s decisive break from a two-and-a-half month rising trend.


Between technical and fundamental progress for the greenback, the latter has greater pull when it comes to establishing a trend. With the break of the benchmark equity indexes this past trading session, we have seen a meaningful shift in power. Many may say it is simply a line that was breached; but that simple pattern is especially meaningful to a market that is heavily populated by speculative traders (versus passive investors). With this changing of the guard, investors will lose the straightforward investment of low-yield funds into otherwise risky assets that have produced consistent and quick capital gains over the past few months. We could attribute this reversal in the crowd’s sentiment to Europe’s troubles – Ireland may very well have exacerbated financial concerns surrounding the entire region by brushing off calls to ask for financial support. However, pressure has been building against sentiment for some time now. We should remember that growth has shown signs of moderating across the globe, speculative-favorite China has taken clear steps towards cooling its economy, policymakers have been given a green light to curb the influx of ‘hot capital’ into their economies and true rates of return (yields, dividends) have not shown meaningful growth. All of this plays towards uncertainty and the dollar’s role as a harbor from unpredictability in its liquid and liberally-supported market.


For more domestic concerns, the op-ed letter written by market participants demanding the Fed not follow through with the second round of its stimulus program was refuted by central banker Dudley. He remarked that inflation concerns were overstated as the policy authority could easily hike rates while maintaining its unorthodox programs. In the meantime, there are early rumblings amongst politicians to redefine the Fed’s dual mandate to a singular focus on inflation. Keeping the focus on policy, the PPI data would add little to the interest rate argument – event at 4.3 percent annual growth. The CPI data due tomorrow will be more focused; but less influential. Other data highlights included the record selling of Agency Debt by foreign central banks in the TIC data and tomorrow’s housing starts figures.


Related: Discuss the Dollar in the DailyFX Forum, John’s Analyst Picks: Patience for Dollar and Euro Trades as Risk Appetite Folds


Euro’s Future Even More Murky after Ireland Resists Financial Aid, Greek Support Falls Apart

Despite a clear deterioration in the market’s perception of Ireland’s financial health, officials refused to seek aid from the EU through the EFSF rescue program. For some, this is a promising development; because country is avoiding greater debt obligations to pay off later down the line – as both the Prime Minister and Finance Ministers have said, the government is fully funded through the middle of 2011. On the other hand, speculative fears are rarely soothed by politicians’ self-severing reassurances. To many, Ireland’s opposition to asking for support at the monthly EU meeting is a step that merely pushes the country and region deeper into a crisis of confidence. While the nation’s government may be fully funded for the next six to eight months, its banking system is very clearly struggling. Irish banks accounted for 20 percent of the ECB’s loans in October; and that lending was equivalent to 80 percent of Irish GPD. Ignoring this issue clearly doesn’t make it go away.


In addition to Ireland’s troubles, financial troubles continue to pop up in other corners of the market. Following the EU’s revision of Greece’s 2009 deficit, Austrian officials said they may withhold the next 190 billion euro contribution to the troubled economy’s bailout fund. Elsewhere, Germany’s Deputy Finance Minister warned they would not back off pressure for a permanent rescue mechanism (saddle bond investors with losses) while fear continues to build that Portugal is soon to follow on the heels of Greek and Irish crisis.


British Pound Helped by High CPI Reading, Hindered by BoE Reiteration for No Hikes

If the market simply followed economic releases, the pound may have surged Tuesday with news that October CPI accelerated to a 3.2 percent rate (a clip that is well above the BoE’s tolerance band). However, the promise of interest rate hikes was completely squashed with BoE Governor King’s statement. Though he did see inflation peaking at 3.7 percent, it was reiterated that they may undershoot medium-term.


Australian Dollar Remains Preoccupied with Rates, Risk as Growth Forecast Indicator Stagnates

The only thing that can seem to stop the Aussie dollar’s advance is underlying risk appetite itself. And, with the S&P 500 leading other capital markets lower, there is a growing wave of uncertainty shaking investors out of their positions. Yet, despite the faded taste for risk and anti-carry push now; economic and interest rate expectations for Australia are still exceptionally robust. When markets turn, the Aussie will lead the move.


New Zealand Dollar Will Find Little Trading Impetus in Upstream 3Q Inflation Figures

Like its Australian counterpart, the New Zealand dollar is beholden to risk appetite trends. In fact, with a less sound economic and financial foundation, the currency is perhaps a little more sensitive to changes in confidence. However, perhaps improved interest rate speculation can improve the currencies standing. We will get upstream 3Q inflation figures early tomorrow; but they won’t carry the same influence as CPI data.