Dollar Anchored to 10,000 as Volume Hits Extreme Lows, Risk Stubborn

• Dollar Anchored to 10,000 as Volume Hits Extreme Lows, Risk Stubborn
• Euro: Policy Officials Testing the Market’s Limits with Greek Rescue Deferral
• British Pound Climbs Despite BoE’s Stimulus Warnings
• Australian Dollar Advances Slowly after Jobs Data, Chinese Data in Sight
• New Zealand Dollar after Unemployment Rate Unexpectedly Rises
• Japanese Yen: Can the BoJ Offer Anything to Fight the Yen’s Strength?
• Gold Volatility at 13 Month Low, Futures Participation Hits Fresh Multi-Year Low

Dollar Anchored to 10,000 as Volume Hits Extreme Lows, Risk Stubborn

Over the past week of active trading, the average daily range for the Dow Jones FXCM Dollar Index has collapsed to a mere 47.5 points. We can see this extreme quiet clearly enough of the dollar’s chart as well as key pairs like EURUSD and AUDUSD. A lull around this time of the year is not particularly unusual as a summer lull is a common enough seasonality effect for the FX market (as it is for capital markets). That said, the current conditions are extraordinarily reserved against a very poor economic and financial backdrop. Coupled with the technical patterns we have on critical benchmarks for investor sentiment, these are the kind of conditions that can turn explosively quickly. What makes it even more perilous is the fact that we don’t have a particular piece of data or scheduled event risk that we can use to attribute a possible time frame for the inevitable return of speculatively-derived volatility. In the meantime, the average range from the Dollar Index for the past two days was the lowest non-holiday level seen since high and low prices have been recorded starting April 2011 while volume for the S&P 500 (my preferred measure of risk appetite) hit one of the lowest non-holiday levels we’ve seen since before the Great Recession and crisis in 2008.

Assessing the known fundamental sparks that could have a reasonable chance of igniting global risk trends, we would have to lower the threshold to include releases like the Greek and Germany GDP figures due next week. And, if conditions like what we are experiencing now were to carry forward, it is more likely that the market’s anchorage would pass undisturbed. That said, we label the current market conditions as ‘extreme’ for a reason – they will not last for long. That said, we are likely to either see one of the ongoing issues (like the Euro Zone debt crisis) offer an unscheduled revival or speculative appetite recharge itself. The latter scenario happens more often than one might expect, those instances are just obscured by force-fit explanations. In the meantime, dollar traders should keep a close eye on the VIX and FX market equivalent as benchmarks for fear (the life blood of a bullish greenback). Outside of the heavy influence of thematic fundamental shifts, dollar traders can keep tabs on the health of benchmark currency and its economy beyond the short-term with the upcoming event risk. The June trade and 2Q mortgage delinquency figures will tap into two critical components of growth. Another event worth keeping tabs on is the scheduled auction of 30-year Treasury bonds. With the standard bearing 10-year yield at a two-and-a-half month high, this could be interesting.

Euro: Policy Officials Testing the Market’s Limits with Greek Rescue Deferral

ECB President Draghi no doubt let out a sign of relief (or offered a smirk of victory) at the end of last week when the euro recovered from the disappointment of no immediate action from the central bank to stabilize the region’s financial health. The central banker effectively ‘bought time’ from the market on no material action. We have seen a number of these efforts pan out in the recent past, but it is difficult to tell if the market respects the threat of future government bond purchases by the ECB through the SMP (Securities Market Program) or if the receding tide in risk did the group a favor. Looking at the ballooned spread between short-term (2-year) and benchmark (10-year) Spanish bond yields, it is clear that the market will not subsist on threats for long. Meanwhile, policy officials continue to test the market’s already strained patience for Euro-area financial pain. The Troika will reported evaluate Greece’s budget efforts (a prerequisite to winning the next round of aid) throughout September and will produce its findings only at the October Eurogroup meeting. Meanwhile, Standard & Poor’s has put the country on credit watch.

British Pound Climbs Despite BoE’s Stimulus Warnings

The sterling managed to advance against both its most of its liquid counterparts through Wednesday’s session – remarkable considering that the BoE’s Quarterly Inflation report delivered an update that both threatened support for further economic contraction and value-eroding (for the currency) stimulus. After the group released its downgraded growth forecast for the coming two years (2.0 percent from 2.5 percent) and projection for below target inflation, Governor King voiced support for Prime Minister Cameron’s fiscal retrenchment effort. Balancing the books to help fend off a Euro Zone crisis spread comes at the cost of short-term growth and sets a tone of central bank balance in stimulus.

Australian Dollar Advances Slowly after Jobs Data, Chinese Data in Sight

The data released through the early part of Thursday’s Asian trading session helped lift the Aussie dollar modestly (a convincing run in these thin speculative conditions will take a serious driver). Australian July employment figures printed close to expectations (14,000 additional jobs against 10,000 expected), while some believe the tempered Chinese CPI figures will open the door up to further easing from the country. We’ll have a second run of Chinese data which will be more attuned to growth and thereby offer a more direct Aussie impact.

New Zealand Dollar after Unemployment Rate Unexpectedly Rises

Historically, it is the Australian dollar’s event risk that is far more sensitive to local event risk than its New Zealand counterpart. That said, the kiwi found a hefty (relative to general market levels) stumble on an unexpected 0.1 percent drop in 2Q employment levels (first drop in six quarters) and unexpected uptick in the jobless rate to a 6.8 percent pace (against an expected two-step drop to 6.5 percent). It remains to be seen whether this has repercussions for the RBNZ’s interest rate outlook.

Japanese Yen: Can the BoJ Offer Anything to Fight the Yen’s Strength?

As expected, the Bank of Japan delivered absolutely nothing from its monetary policy decision this morning aside from a self-confirming assessment that the group was implementing ‘powerful monetary easing’. The BoJ is the prime example of how constant warnings without action can undermine a central bank’s effectiveness – to that point that actual changes don’t offer influence. The BoJ may be totally tapped for options.

Gold Volatility at 13 Month Low, Futures Participation Hits Fresh Multi-Year Low

Market conditions are anemic market wide, but they are even more extreme for gold. The metal was turning to congestion long before the recent speculative fog descending on the capital markets, and the risk is that the eventual rebound in market tempo may not deliver the long-awaited return to trend for the commodity. Currently the CBOE’s gold volatility index is at a 13-month low and futures open interest, a three-year low.

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