Dollar Posts its Biggest Advance in Two Weeks, Don’t be too Excited

In normal trading conditions, the biggest rally in two weeks would be quiet the feat. However, the dollar’s advance through Tuesday was hardly impressive at a sparse 0.2 percent. That is more a reflection of…

• Dollar Posts its Biggest Advance in Two Weeks, Don’t be too Excited
• Euro Mixed Despite Clear Disappointment in Fundamental Wave
• British Pound Finds Unexpected Boost in CPI Data, Will Jobs Data Reciprocate?
• Japanese Yen: BoJ Officials Note Uncertainty, Greater Willingness for Stimulus
• Australian Dollar: AUDUSD Working on its First Four-Day Decline in Three Months
• US Oil Eyeing 95 as Markets Weigh the Risk of War in the Middle East
• Gold Breaks Congestion, Finds No Follow Through on the Tentative Move

Dollar Posts its Biggest Advance in Two Weeks, Don’t be too Excited

In normal trading conditions, the biggest rally in two weeks would be quiet the feat. However, the dollar’s advance through Tuesday was hardly impressive at a sparse 0.2 percent. That is more a reflection of the market’s general lacking volatility / volume than it is a stand out move from a particular currency. However, a bullish bias for the dollar in general is impressive. Looking at general measures of risk appetite these past few weeks, we have seen the balance tip clearly in the favor of higher yielding assets which has carried the S&P 500 and Aussie dollar higher and should thereby undermine the greenback’s position. And yet, the first close from the VIX (a common measure of volatility and fear) below 14 percent in years as well as countless other measures of market ‘stability’ have not turned the Dow Jones FXCM Dollar’s year-long bullish drift.

Euro Mixed Despite Clear Disappointment in Fundamental Wave

Those that were expecting a swell in volatility and potentially revived trend from the Euro were left severely disappointed this past session. The docket for the region was loaded with event risk that carries more than sufficient weight to spur major swings in the market during normal market conditions. Alas, we are dealing with normal market conditions. The burden of any fundamental release in encouraging a lasting trend form its respective currency is the kind of impact that can also jump start the global market’s expectations for broader risk trends – a tall task indeed. As for the listings, the top billing for the session was the first reading on second quarter GDP readings. For the big picture, the Euro Zone reported a 0.2 percent contraction through the three-month period – in line with expectations but a confirmation of hard times for the region. A more interesting read was that the region’s backbone, Germany, reported a weaker than expected 0.5 percent annual rate of growth on a 0.3 percent quarterly performance which is the slowest since the final quarter of 2009. In comparison, bailout country Portugal recorded a deeper 1.2 percent drop for the three-month period. In addition to the lumbering growth readings, the German investor sentiment survey dropped to a December low while the Greek 3-month bill auction dazzled by selling more paper than expected (but at a very painful yield).

British Pound Finds Unexpected Boost in CPI Data, Will Jobs Data Reciprocate?

The sterling showed a surprisingly level of activity this past session – particularly against the comparatively weak Japanese yen. It seems that weakness in counterparts (most notably the yen, kiwi and Aussie dollars) offered most of the session’s leverage, but the pound had its own fundamental help. The newswires offered two notable headlines. The first, non-data update was news that the UK ministers would soon present a package aimed at stimulating housing construction. Home prices have soared, but more due to a function of supply and in particular regions. To really see the sector contribute to growth, broader construction activity has to respond. For FX traders, the greater relief could come from the CPI data for July. The 2.6 percent, year-over-year reading was stronger than expected and helps curb the need for immediate stimulus.

Japanese Yen: BoJ Officials Note Uncertainty, Greater Willingness for Stimulus

The yen showed losses across the board this past session, but this dive wasn’t the responsibility of risk trends. The struggle from US equities this past session and the general improvement in the dollar’s bearings this past session tell us that there was something specifically troublesome for the yen. Following Monday’s disappointing GDP report, the top docket offering this past session was the BoJ’s minutes from the previous meeting. The lean of their assessment was far from surprising. That said, the suggestion that some members are growing increasingly worried about the spillover from the Euro Zone crisis and that no options should be let off the table tells stubborn yen bulls intervention is a growing risk.

Australian Dollar: AUDUSD Working on its First Four-Day Decline in Three Months

In a market of extremes, the Australian dollarhas an impressive set of extraordinarily reserved activity measures. As a measure of activity, the number of days that the five-day average true range has held below 30 pips has reached an incredible 6 consecutive days. We haven’t seen trading conditions this quiet since before 2008. It is this exceptional level of inactivity that makes the effort this morning to push for a four-day decline (the first in three months but only covering 115 pips) look impressive. That said, it is not. We have seen similar efforts to correct the prevailing trend since the bull wave began back on June 1, but it has consistently failed until now. And, without a deeper level of conviction from these markets, changes in trend will be difficult to sustain. Meanwhile, on the fundamental tack, we find the 12-month RBA rate forecast (measured through Credit Suisse overnight swaps) is only projecting 57 bps worth of cuts – very near the most ‘hawkish’ in five months. More distinct this morning, the August Westpac consumer confidence survey printed its first drop in four months.

US Oil Eyeing 95 as Markets Weigh the Risk of War in the Middle East

Oil has joined the throngs of other physical and financial assets in bleeding volatility. The commodity’s average daily range over the past week reflects the quietest trading conditions we’ve seen in two-and-a-half months. An average daily range of less than $2 just below 95 should be considered more of a breakout risk than reflection of stable markets. On the supply side, US crude oil inventories (measured by the DoE) are just 4.5 percent off of the 22-year high set back in June while China is leaning towards stimulus efforts to jump start flagging economic activity. Supply risks carry the greatest volatility potential however. The ongoing uprising in Syria and constant concern that Israel is contemplating a strike on Iranian nuclear facilities keeps traders on the cusp of speculation and action.

Gold Breaks Congestion, Finds No Follow Through on the Tentative Move

A second day of selling has forced gold out of a constricting 25-point range, but the move has done little to improve the metal’s trend opportunities. We are finding numerous, extreme congestion readings across the markets that are developing because of the extraordinary inactivity of the capital markets. Breakouts in these circumstances are highly likely, but momentum and follow through given the relative inactivity levels are far less likely. Keeping track of other activity reads for the precious metal, we find that futures volume actually decelerated from Friday’s and Monday and is now 12-day below the one-month average while the CBOE’s Gold Volatility Index marked a fresh 17-month low on Tuesday’s close. We are very close to overtaking the April 12, 2011 low and setting a record for the measure (with records going back to 2008).

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

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

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