Dollar bulls look for swell in volatility

The

dollar managed briefly to push its way to its highest level of the week Friday and temporarily overtook the closely watched 10,000-figure. However, the safe haven currency was ultimately unable to hold this technical progress as capital markets refused to slip and risk trends trailed off quietly into the weekend. As the world’s reserve currency – and paradoxically hosting the greatest threat to global financial (the US Fiscal Cliff) – the greenback requires considerable motivation to extend its bullish run from mid-September amid a dwindling speculative crowd. That is quite the quandary because the biggest risk to stability is anchored and keeping the currency distracted. Looking ahead to the new week, dollar bulls need a swell in volatility and tumble in risk assets. There is plenty of event risk to stir activity for individual currencies, but little to stir the more profound fundamental risk. Fiscal Cliff headlines will continue to draw traders’ attention (whether bullish, bearish or neutral). Without an overwhelming risk move, the dollar may need to wait until the following week when the Fed con- venes.

Euro Rally Stalls Once Again Before EUR/USD Can Overtake 1.3000

The Euro-area headlines were busy Friday, but the most profound update was released until the speculative community had already wound down for the weekend. Trying to find its way to the front of the pack, ratings agency Moody’s announced that it had cut both the European Stability Mechanism’s (ESM) and European Financial Stability Facility’s (EFSF) ‘AAA’ top credit ratings. The funding programs are integral to the Troika’s efforts to stabilize the Eurozone’s financial markets. Evidence that the areas of funding (rescue programs and countries) invites the risk that political will may not be the only impediment to a full recovery. Expect this after-hours release to play through early next week. Further immediate concern for fundamental traders next week will be the Eurozone and European Union Finance Ministers separate meetings as well as any news related to the Greek Debt Management Agency’s efforts to draw interest for the bond buyback (an effort that will deliver current, private bond holders instant losses). The ECB decision will likely be a focal point, but they are unlikely to move beyond OMT.

Australian Dollar: RBA Carries Top Event Risk of Central Bank Meets

Despite the Australian dollar’s penchant for leveraging risk trends into volatility, AUDUSD proved to be one of the more reserved pairings this past week. In fact, its activity level (10-day ATR) was the lowest we have seen since 2007 – yet, not that unusual given the general state of volatility measures across the market. That quiet will be difficult to sustain, however, heading into next week as the market is already pricing in fireworks from the RBA. Though we haven’t seen much change in central bank rhetoric or data recently, overnight swaps are pricing in a clear bias for an RBA rate cut come Tuesday. With an 83 percent probability of a 25bp cut, a move can get the Aussie moving…and so could a hold.

Japanese Yen: Policy Officials Pass Currency Responsibility Back to Risk

It has become something of a running joke that Japanese policy officials couldn’t influence their currency even if they acted upon the market with heavy rounds of stimulus or direct FX intervention. Yet, over the past three weeks, market participants have started to show a little more respect for their commitment to devalue the local currency and help support growth. LDP Opposition Lead Abe has been integral to the effort by voicing a commitment to escalate the issue to the point that policy effort could offset risk flows, repatriation and other currents of capital flow – that he could potentially rescind the BoJ’s independence and embark on unlimited stimulus. That threat was worth hundreds of pips on yen crosses, but the drive may be over. This past week Abe recanted his BoJ override.

British Pound Little Moved on the Week, Can the BoE Shake Things Up?

While the broader FX markets were little moved, the sterling stood out for its lack of influence. The currency has struggled to rouse its own volatility – much less trend – and there are few things that can unseat that complacency. One of the few events that carry the necessary influence is the Bank of England monetary policy meetings. The central bank has fallen far behind the pack in terms of stimulus, which is unusual given Governor King’s vocal concerns and the government’s dedica- tion to austerity. Market’s are expecting no change to the asset purchase program, but the discuss of different programs may start to pop up. If they do, expect the sterling to tumble.

Canadian Dollar: USDCAD Implied Volatility Slowly Picks Up from Record Low

We already know USDCAD to be one of the most resistant to trend amongst the non-managed and highly liquid pairings. However, in these generally mute market conditions, it seems even this quiet pair is managing incredible extremes. This past week, the oneweek implied volatility (expectations for market movement) for USDCAD slowly advanced from its lowest level on records going back nearly 13 years. That passive view was deserved given the top concern facing the global markets (Fiscal Cliff) would impact both the US and Canadian currency to similar magnitudes. Yet, extremes do not last; and the Canadian dollar will have a chance to stir volatility in the immediate future. The first nudge higher came this past week with 3Q trade and GDP figures. Coming up we have the BoC and Canadian employment data. It is worth mentioning that we haven’t seen a weekly move over 200 pips from this pair in nearly a year. Is it overdue?

Gold’s Chances to Overtake 1800 in 2012 May be Over

Through the past week, gold was the stand out amongst the various ‘high profile’ assets. While US equities extended their slow climb, the euro suffered some volatility following the Troika’s approval of Greek aid distribution and the dollar retrenched into congestion despite the ticking countdown to the Fiscal Cliff; gold had clearly topped the market for activity. Futures volume through the past week and month were the highest seen since the period through June 1. Further, the pickup in trading and a unique consistency of trend led the metal to the biggest weekly drop since June 22. For all intents and purposes, an active market. However, when we look at the CBOE’s gold volatility index, we find expected volatility levels at series lows. Through all the activity, gold has held back from developing a meaningful trend (bullish or bearish). We have to consider the metal slid despite a stalled dollar and escalation of US fiscal fears. At this pace, little could drive us back to 1800 before year end.