Forex Magnum

• Dollar Retrenches Alongside Volatility Anticipating Heavy Waves
• Euro Summit Beings, How Should We Gauge its Progress?
• British Pound Ignores Data, Focuses on Unpredictable Euro Crisis
• Japanese Yen Fights Long-Term Financial Issues as Short-Term Risks Swell
• New Zealand Dollar Undeterred by Data, Risk Trends and Rates All that Matter
• Australian Dollar: Looking Beyond Near-Term Volatility Threats is the RBA
• Gold On the Cusp of a Breakout, But What Escalates it from Minor to Massive?

Dollar Retrenches Alongside Volatility Anticipating Heavy Waves

The dollar made the effort Wednesday to recover the ground lost the previous trading day and nothing more. With another swell of major fundamental event risk just ahead of us, the collective masses have little intention of placing a big bet just to see an unfavorable European policy outcome steamroll their positions. Two weeks ago, the market’s progress was curbed by the scenarios swirling around the Greek election; and last week, the focus was the Fed rate decision. Speculative positioning doesn’t stop for every individual piece of fundamental event risk, but matters as important and encompassing as the upcoming EU Summit drill down to the very foundation of the market’s risk-reward equilibrium. The question that dollar traders need to ask is whether this messy event risk can spark serious volatility in the near-term and what the probability that big events over the next two weeks will continually distract us from a meaningful trend.

Given the intensity and scope of the two-day gathering of the Euro-area’s leaders, it would be reasonable to expect the kind of market impact that followed shortly after the Fed disappointed capital markets by withholding QE3. However, there is a critical difference between this and last week’s fundamental climax. For the FOMC decision, we knew what a good, mediocre and bad outcome would look like as well as the distinct time frame when we could make the assessment. This time around, there are numerous possibilities and there is talk that the event could continue through the weekend. Uncertainty is generally attributed to risk aversion, yet deleveraging is an active effort. To determine if the dollar is due for a big move (and will stick with it), we should watch a speculative benchmark and implied volatility readings. My preference is the S&P 500 and the FX Volatility Index or traditional VIX. Strong ‘risk on’ (the equity index’s territory) or ‘risk off’ can get the greenback moving.

Euro Summit Beings, How Should We Gauge its Progress?

After three days of public bickering for European policy officials, they are finally in a position to make progress on the fire fight against sovereign debt, banking sector, credit and economic crises. With the standard indicator or event we could set our expectations against a consensus number or primary topic, but this event is far more complex than that. To successfully navigate this groundswell, we need to assess not only the various moving parts but the market’s collective expectations as well. Heading into the scheduled, two-day European Union Summit; the markets have shown that their appetite for temporary fixes to escalating financial troubles is fading quickly. The ‘half life’ of programs can now be measured in hours (just look at the lackluster reaction to Greece’s restructuring, then its election and most recently Spain’s banking bailout).

What this tempered market reaction suggests is a natural bias towards negative interpretation and need for concrete short and long-term programs to turn the euro to a lasting recovery. There are a number of topics on tap for discussion and a lot of debate surrounding those that can carry the most weight towards providing stability. For the long-term, a move towards a Banking and/or Fiscal Union - along with the common regulator and joint liability it would entail - would represent the path to real change. That said, it is a very complex objective and comes at a time when market confidence could be undermined in the short-term under such a program. The immediate answers to crisis concerns rest with renegotiating Greece’s bailout conditions, the concept of issuing EU common bonds and enabling the ESM to purchase regional bonds.

British Pound Ignores Data, Focuses on Unpredictable Euro Crisis

The sterling had a mixed session or data this past session. Where the BBA home loans figures supported growing stimulus calls for the Bank of England, the CBI retail sales report for June surged unexpectedly to its highest level since December 2010. However, this past round of data and the upcoming final readings on 1Q GDP won’t capture pound traders’ attention. The speculative ranks are focused in on the more immediate threat: the spillover of the Euro-area crisis if officials don’t seriously boost their efforts to put out the fire. That said, don’t look for trend Thursday.

Japanese Yen Fights Long-Term Financial Issues as Short-Term Risks Swell

Policy officials have recognized that they do not have a lasting influence over the exchange rate – efforts at direct intervention and larges asset purchase programs have proved that. There is little that can be done in the face of a heavy sentiment winds that carry the funding currency higher and lower depending on the appetite for carry. In contrast, the tax legislation being pushed now can have real, long-term influence.

New Zealand Dollar Undeterred by Data, Risk Trends and Rates All that Matter

We have become acclimated to the New Zealand docket’s lack of influence over its currency long ago. In the best or worst of times, the kiwi is an investment currency and thereby follows risk trends. Therefore, the lack of influence coming off of the sharp drop in the NBNZ’s business sentiment indicators for June (both confidence and activity outlook dropped to March 2011 lows) shouldn’t surprise. For the kiwi, we are once again following risk trends and to a lesser extent rate expectations. There is still a mild call for a 25bp cut at the next meeting, but it’s tame.

Australian Dollar: Looking Beyond Near-Term Volatility Threats is the RBA

With the EU Summit ahead, there is little doubting where Aussie dollar traders are looking. As they wait, however, we have seen a few more steps towards the stimulus that helps stabilize fears of volatility and thereby bolsters the case for passive carry. According to reports from Bloomberg, traders with the PBoC have suggested the central bank was going to inject another 30 billion yuan in capital through two-week repos (in addition to the 95 billion yesterday). But that is today. It’s worth looking out to consider the impact of next week’s RBA rate decision…

Gold On the Cusp of a Breakout, But What Escalates it from Minor to Massive?

Gold has worked its way into a tight position with technical boundaries suggesting a breakout will have to come soon regardless of the market’s fundamental assurances. We need to ask what can elevate a minor break to a critical one. The traditional risk appetite / risk aversion argument isn’t as valid here. Whether the EU fails to provide stability for the European financial system or it offers financial support that offers immediate relief, the alternative store of wealth will look tempting. The real question is whether the dollar or gold ends up looking better.

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