FOREX: Dollar at High Risk of Reversal Unless Aggressive Euro Selling or Risk Aversion Kick In

•Dollar at High Risk of Reversal Unless Aggressive Euro Selling or Risk Aversion Kick In
•British Pound Traders May Make Up for the Lack of BoE Reaction with the Quarterly Report
•Euro Once Again Pacified by Empty Words of Stability from Officials, Poor Greek Auction
•New Zealand Dollar Under Greater Pressure after RBNZ’s Bollard Agrees with IMF
•Canadian Dollar Borrows Inspiration from the Rebound in Oil, Looks Ahead to Trade
•Australian Dollar Doesn’t Fear the Withdrawal of Stimulus Like the Pound Does
•Gold Advances at a More Controlled Pace as Investors Await Dollar’s Fate

Dollar at High Risk of Reversal Unless Aggressive Euro Selling or Risk Aversion Kick In

The impressive climb the dollar was able to manage last week has fully stalled. What we need to determine now is whether this lack of momentum is merely a period of consolidation or the beginning of a revived selling effort. Looking back to the genesis of this counter-trend move (there is no doubting the bearish intentions of the market since the year began), we were coming up short on the primary fundamental drivers. Though there are literally millions of potential catalysts for the dollar, a meaningful trend will really only come through specific developments. It so happened that the advance began with a tame retracement in investor sentiment that saw the S&P 500 pull back from multi-year highs. Playing to the safe haven appeal of the greenback is one of the few sure-fire ways to encourage the currency higher. However, by Thursday, the burden of momentum shifted over to the aggressive unwinding of the euro; which benefits the dollar by virtue of EURUSD representing the most liquid currency pair if the FX market. Given the conviction in the euro selloff; it was easy to overlook the fact that sentiment trends were staring to rebound. Therefore, when the run against the greenback’s primary counterpart tapered, we would be left to the same lackluster fundamentals.


In addition to a notable euro bounce this past trading session, the dollar would also confront the S&P 500’s biggest rally in two weeks. When yield appetite supersedes doubt over uncertain risks, the record low yields on the dollar and ample speculative liquidity pumped in through stimulus will quickly put the greenback under pressure. Yet, we need to keep a close eye on conviction behind the build in risk appetite and the dollar’s position as a funding currency. Optimism itself, is proving harder and harder to generate and sustain. With this week’s recovery, we should note that the benchmark equity index’s climb sees volume is still running at exceptionally low levels following the second lowest level of turnover noted this Monday. As for the dollar’s role as a safe haven, the role is still well-engrained; but we are quickly coming to the June expiration of the $600 billion QE2 program. Richmond Fed President Jeffrey Lacker made note of this fact Tuesday when he commented that stimulus should be withdrawn after the facility matured. And, offering a more definitive hawkish tone, he went on to say the central bank risks “losing ground on inflation” and it was better to act “preemptively” on price pressures. We’ll look to see whether Kocherlakota can keep up the hawkish speculation in the upcoming US session; but don’t expect it to offer the dollar much reprieve.

Pound Back in Focus With Bank of England Inflation Report On Deck

Markets remain in a state of consolidation following the previous weekly moves and we are waiting to see if the latest USD rally can extend gains, or if this is yet another short-term correction ahead of the next round of currency buying. In the interim, developments on the fundamental front have been rather quiet with the main story still coming out of the Eurozone as EU officials continue to deny the rumors of a Greek debt restructuring. Nevertheless, with all of the talk, market participants have not been able to easily dismiss the rumors and remain somewhat unsettled.


Data out of China overnight has failed to materially influence price action on Wednesday thus far, with risk appetite remaining intact despite some higher inflation and softer retail sales and industrial production out of one of the world’s fastest growing economies. The Australian Dollar which is highly correlated to China, has in fact rallied on the day back above 1.0850 thus far. Meanwhile, both the Yen and Franc are finally starting to show signs of basing, and we could see these currencies start to sell of more aggressively over the coming sessions. We contend that even in a risk negative environment, both the Yen and Franc stand to lose ground with both currencies trading by record highs and due for a major trend reversal. Some softer inflation data out of Switzerland on Tuesday certainly helps our argument.


Looking ahead, the Pound will come back into focus in Wednesday trade with the highly anticipated Bank of England inflation report due out, along with some other key data in the form of UK trade. Other important data releases on the day include German inflation and US trade. On the official circuit, ECB’s Mersch, Bini-Smaghi, Stark, and Orphanides are slated to speak along with Bank of England Tucker and Fed’s Lockhart, Kocherlakota and Pinalto. US equity futures and oil prices are flat while gold tracks moderately higher.