Forex News: Dollar Range to Break but with a EURUSD Plunge or Rally?

Volatility and trend were under lockdown for the forex market through the open 48 hours of trading. In fact, fear of sudden and aggressive moves from the currency market is so low that the FX Volatility Index is currently reading its lowest level in over five years (at 7.65 percent).

• Dollar Range to Break but with a EURUSD Plunge or Rally?
• Euro Spared Pain of Deepening Spain, Greece Trouble by Absent Risk
• Japanese Yen Rallies after BoJ Stimulus – Why it Won’t Last
• Canadian Dollar: Will GDP Push USDCAD Above Parity or Will Jobs Do It?
• British Pound: Speculation Focuses on Whether BoE to Play Catch Up
• US Oil Unnaturally Quiet Through Record Breaking Hurricane
• Gold: Is Congestion Indicative of Bullish Reversal?

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Dollar Range to Break but with a EURUSD Plunge or Rally?

Volatility and trend were under lockdown for the forex market through the open 48 hours of trading. In fact, fear of sudden and aggressive moves from the currency market is so low that the FX Volatility Index is currently reading its lowest level in over five years (at 7.65 percent). For the US dollar – the preferred shelter from financial storms – stability is a bearish catalyst. However, looking at the Dow Jones FXCM Dollar Index (ticker = USDollar), we can see that the greenback has certainly transitioned into congestion; but it has yet to take a serious bearish move. Seasoned fundamental traders should recognize that both the lull in activity and the congestion for the dollar are temporary. The eerie calm reflects hesitation seen in underlying investor sentiment from last week, but the situation has been exacerbated by the absence of US speculators.

Heading into Wednesday, the US equities and bond markets are expected to come back online. With the New York financial center knocked offline two days by Hurricane Sandy, the transmission of global risk trends has been notably disrupted. It should also be said that many of the more influential and longer-lasting risk runs develop during the New York trading session. Considering that Asian and European market volume and volatility readings have also atrophied during this period, the potential for a sudden rebound in speculative activity is high. The more pressing question is what direction a rebound in volatility will encourage – if it encourages a distinct bearing at all.

In the downtime to Wednesday’s main event, fundamental developments have done little to change the generally unflattering outlook for the global economy and financial markets. Persistent Euro-area financial problems carry possible infection risk for the global system and the Spanish growth reading is a disturbing read on the rest of the region. State-side, September’s personal spending figures draw questionable comparison to job and wage figures. A blind, influx of speculative liquidity can fall either way (end of month window dressing may add to the repositioning of those that went flat before the hurricane); but there is little to keep a bullish market going for long. Alternatively, should the first move be one of risk aversion (bidding the dollar as a safe haven), there would be plenty of fuel to feed the fire.

Euro Spared Pain of Deepening Spain, Greece Trouble by Absent Risk

The euro dodged another fundamental bullet this past session. As the headlines continue to show a long-term Eurozone descent into a deeper financial crisis, the currency manages to hold back the tide by playing to traders’ appetite for short-term fixes. Nothing on the newswires was supportive of the region’s overall picture. From the docket, the first increase in the Germany jobless rate in three years was overshadowed by Spain’s 3Q GDP reading. The 1.6 percent contraction on a year-over-year basis was the steepest since the final quarter of 2009, while the 0.3 percent performance just on the three-month period represented a fourth consecutive contraction. That adds a little more tangibility to otherwise ethereal promises. Meanwhile, Greece’s coalition reportedly has enough support to push through the 2013 budget. The austerity package will require more discussion, and Samaras has said he is looking for more than just the release of the next aid tranche – implicit acknowledgment that the situation requires more than just the ‘next step’. The upcoming session is loaded for further event risk. Spain’s deadline for its bad bank requirements and a supposed bond redemption will join trade and housing data. Greece is expecting another call with the Troika and retail sales.

Japanese Yen Rallies after BoJ Stimulus – Why it Won’t Last

If we have learned anything from the Fed’s aggressive stimulus efforts it is that blowing up the money supply has a depressing effect on a currency. We do see eventual deviations from that rule of thumb over time, especially when the currency in question is a safe haven – like the yen. However, risk trends are on hiatus; so where did the yen’s rally that followed news that the BoJ had increased its asset purchase program by 11 trillion yen to a total 91 trillion yen come from? Consider that the most recent increases saw absolutely no market movement. Furthermore, heading into this meeting, the government’s calls were leaning towards a 20 trillion move. A temporary rally, but not one that lasts.

Canadian Dollar: Will GDP Push USDCAD Above Parity or Will Jobs Do It?

The Canadian dollar has been adrift without a solid risk trend bearing. That passive evolution will be stirred with any increase in speculative conditions in the upcoming session, but the dual-purpose (safe haven and investment) currency doesn’t have a clear bead on sentiment even if it does take. To help with that indecision, we have the Canadian GDP figures for August. This is a monthly figure – not quarterly. Its influence, historically, is not particular persuasive; but if the market needs a reason, it can find it here. Otherwise we wait until Friday’s job numbers.

British Pound: Speculation Focuses on Whether BoE to Play Catch Up

We won’t see the Bank of England ruling on monetary policy until next Thursday, but sterling traders are already trying to draw a bearing on the event. While the MPC started the run with a Funds for Lending program, the market impact was always going to be minimal and economic influence dubious. Following on the heels of the BoJ’s stimulus increase, the Fed’s QE3 and ECB’s OMT program; the BoE is not only behind the curve but it is also at risk of seeing itself priced out in a currency war. Will they respond with stimulus? The market thinks so.

US Oil Unnaturally Quiet Through Record Breaking Hurricane

Over the past week, US oil has traded generally within a 1.50-point range. And, before we attribute this to a sidelined US market; it should also be said that Brent has kept a range of 2.50 points. This is exceptionally quiet for a commodity that should see direct supply-demand implications from the largest storm in the recent history. This tells us two things: supply is more than ample and oil traders are looking for distinct risk trends.

Gold: Is Congestion Indicative of Bullish Reversal?

For the past three weeks, gold has carved out a bear trend that has put progress behind the notable reversal from 1800. Yet, with the dollar sidelined by incoherent speculative trends; the metal finds itself similarly on ice awaiting a clear bearing. Speculative interests seem to be on the rise with ETF holdings at a fresh record, but the drop in futures volume and lack of committed ‘investors’ should leave us dubious of direction.

**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

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

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