Forex Analysis: Dollar Run May Be Over, EUR/USD Still a Breakout Risk

While the EURUSD has ended this past week dangerously close to well-worn technical resistance, the dollar itself has shown considerable resiliency through the past week. Though given the level of risk aversion that it took from traditional speculative assets like US equities to squeeze out the modest gains for the currency, further advancement could be a serious problem through the coming week. The lack of momentum recent can prove a serious threat to developing a lasting trend.

• Dollar Run May Be Over, EUR/USD Still a Breakout Risk
• Euro: Tuesday’s EU Meeting on Greece Critical
• Japanese Yen: Have We Witnessed the Cyclical Change?
• British Pound Traders Wait to See if the BoE is Warming to Stimulus
• Swiss Franc May Not Hits 1.2000 if Greece Fire Snuffed
• Canadian Dollar: A Safe Haven for Safe Havens
• Gold Fear Levels at Recent Historical Lows

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Dollar Run May Be Over, EUR/USD Still a Breakout Risk

While the EURUSD has ended this past week dangerously close to well-worn technical resistance, the dollar itself has shown considerable resiliency through the past week. Though given the level of risk aversion that it took from traditional speculative assets like US equities to squeeze out the modest gains for the currency, further advancement could be a serious problem through the coming week. As we look ahead to the unusual trading conditions ahead, it is important to appreciate that the Dow Jones FXCM Dollar Index (ticker = USDollar) has managed a three-week consecutive climb and has essentially maintained a consistent bull trend since mid-September. However, the lack of momentum recent can prove a serious threat to developing a lasting trend.

In the world of Forex, the dollar is not a currency sought for its potential return. In a global market that is suffering historically-low yields, investors have had to take on assets that would normally be far too risky to even consider under normal circumstances (like high-yield junk bonds). Yet, the vow of stimulus from the Fed and others has obliterated all respect for normal market risks and encouraged further leveraging. That lack of appreciation for ‘black swan’ events that are not even extreme much less unlikely (like a bear market in capital markets) leverages the dollars potential should volatility indexes (as fear measures) rise from their multi-year lows. However, in the meantime, speculative liquidity will drain for the Thanksgiving holiday and big ticket risk themes (Greece, Fiscal Cliff) are tempering. That presents little need for liquidity.

Euro: Tuesday’s EU Meeting on Greece Critical

With the benchmark US equity indexes off sharply these past weeks and carry trade measures starting to ease off as well, it is safe to say there is a significant risk aversion backdrop. Yet, if that is the case, why is the FX market’s more fundamentally troubled major higher against nearly all of its counterparts through the end of this past week? We may be witnessing the early unwinding of speculative and hedge short interest and early bidding on depressed assets on the assumption that Greece will finally find its aid relief come Tuesday. And if they don’t…

Japanese Yen: Have We Witnessed the Cyclical Change?

USDJPY is 5.4 percent higher than the swing low set in September and 7.9 percent off the record low printed last year. That said, the pair is still 39 percent off the high set back in 2007 – before the global financial crisis and recession. What makes this particular pair so interesting to review versus other yen crosses is that it pits two currencies that are very similar on a structural level against each other. They are amongst the largest economies, most liquid currencies and have lasting fiscal / financial issues. And, despite their comparable qualities, the yen is just off a record high versus the dollar. This discrepancy has long been the base for USDJPY bulls, but it hasn’t really caught traction until recently. Why? Now, all carry between the two is flushed, both central banks are flooding the market with money and Japan’s financial bind is untenable.

British Pound Traders Wait to See if the BoE is Warming to Stimulus

Like the Eurozone, the UK is struggling to turn its economy into the black as it pushes forward with austerity. Yet, unlike its mainland counterpart, Britain neither has the support for economic backstops nor a central bank that is willing to pull out all the stops to offset the fiscal crunch. That is a troublesome mix; and yet, the sterling is still considered to be sounder than the euro and many other counterparts. That assumed strength won’t last forever; and it will recede more quickly if the UK continues to suffer an economic slump. Currently, the consensus is for the country to contract in the fourth quarter. Traders will watch closely next week to see if the BoE minutes show a warming towards much-needed stimulus.

Swiss Franc May Not Hits 1.2000 if Greece Fire Snuffed

EURCHF has dropped for three consecutive weeks – the longest bearish series since the pair bottomed out at the SNB’s dictated 1.2000-floor. This franc appreciation has nothing to do with anything that has changed fundamentally in Switzerland. Rather, this painful (for the central bank) retracement is a sign of the slide of the euro’s health and European’s demand for shelter from the Euro-area’s storm. At this pace, we would easily expect to return to the FX-markets more steadfast boundary by the end of the coming week. However, there is a complication we must factor in. There are options that the Swiss have to turn the exchange rate away from 1.2000, but they wouldn’t act unless it was clear that we were once again anchored there. Instead, a possible short-term fix to Greece’s problems Tuesday can stem the capital flight from the EU.

Canadian Dollar: A Safe Haven for Safe Havens

Let’s take score of the Canadian dollar. The economy has a consistent investor and consumer in its trade relationship with the United States, it has not suffered crippling recessions like its global counterparts, the country’s financial system has yet to suffer a crisis, and its benchmark yield is 1.00 percent. This is a currency that offers both stability and a relative yield. In other words, it is a safe haven that investors can hold for a competitive level of return. That is something that was supported this past week by the report of C$13.9 billion in capital inflows through September for foreign investment. Yet, there is one thing the loonie does lack: liquidity comparable to that of the greenback. And, given how anemic returns are in Canada and across the globe, the markets will be far more sensitive to risk that demands depth rather than tepid yield.

Gold Fear Levels at Recent Historical Lows

When it comes to fundamentals, gold’s bearings are relatively easy to read: if the market is concerned about the devaluation of standard currencies (inflation), they will frequently head to this alternative store of wealth. The question becomes what can drive investors away from all fiat money? There are safe havens in the FX world that we can shift to in normal conditions. Therefore, we either need to see a threat to the general financial system whereby all assets backed by struggling governments look unstable or we simply see the currency market’s safe havens undermined. The vow of unlimited stimulus programs by the Fed, ECB and BoJ all add an indirect boost to the precious metal. Yet, the availability does not necessarily (nor even likely) translate in an long-term infusion of funds. If risk trends settle into the coming week, the need for an alternative harbor from financial instability will assuredly draw from gold. Currently the metals volatility index is the lowest on series record.

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

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