Dollar Fundamentals Strengthening in Fed and ECB Wake, NFPs Next

• Dollar Fundamentals Strengthening in Fed and ECB Wake, NFPs Next
• Euro Schizophrenic After ECB Decision, Ultimately Bearish
• British Pound Finds No Relief from ECB Crisis Fight, BoE Policy
• Australian Dollar Tries to Cling to Data to Offset Risk Headwind
• Japanese Yen Outperforming Dollar in Low Volatility Risk Aversion
• Swiss Franc: Swiss Yields a Timely Sign of Pressure on EURCHF
• Gold In a Four-Day Tumble after Both Fed and ECB Deny Stimulus

Dollar Fundamentals Strengthening in Fed and ECB Wake, NFPs Next

The positive shift in market sentiment through the end of last week has lost its fundamental support and subsequently retraced much of the risk gains won as a result. With the two most influential opportunities to bolster risk appetite (options to change the Fed and ECB stimulus programs) having past without fresh support, we are left to more barren fundamentals and an inflated speculative position. However, the disappointment for many that the world’s two largest central banks shunned speculators this week shouldn’t immediately lead us to expect a mass deleveraging. If it weren’t for the buildup in expectations across the market ranks that more stimulus could come down the pipeline, the steady policy position would have translated as a non-event. With the pullback from the S&P 500, Euro, high-yield currencies and climb from the US dollar this week; we have deflated much of the exaggerated risk premium. Taking the next step towards a bear wave for the capital markets and proactive drive for the safe haven US dollar requires a kinetic sway over global investors. We have plenty of fuel. We just need a spark that will catch.

While the Fed and ECB decisions to forgo preventative stimulus are moves that are closer to setting us back to neutral, the fundamental backdrop that is exposed without the luster of hope is certainly threatening. Global rates of return are just off historical lows, growth in the developed and emerging market economies is slowing, we are coming off the most disappointing US earnings season since the last crisis and there is the immediate threat of crisis contagion. The missing ingredient is the kind of fear of loss that triggers a cascade of deleveraging. There will no doubt be some that believe the July NFPs figures could provide a push. The consensus for 100,000 jobs added to the economy leaves plenty of room for surprise (negative and positive), but this indicator has been somewhat disarmed. After the 2Q GDP reading last Friday, the bearing on growth is rather clear. Furthermore, the Fed’s decision not to move on stimulus speaks to a stronger resistance to one-off, bad readings. Unless sentiment has finally been pushed to a breaking point (risk premium too low), volatility will not transition into trend. It is the habit of the market to track decisive events/indicators, but we should also keep temperature of a disturbing trend of more frequent banking collapses.

Euro Schizophrenic After ECB Decision, Ultimately Bearish

Distilling the decisions made, the comments offered and the vows made after the ECB meeting; it is safe to say that policy was left unchanged. Against the backdrop of a market that was clearly expecting some kind of stimulus response after President Draghi’s remarks to do anything necessary to protect the Euro last week, this event dons a negative light. Indeed, the previous advance for the Euro and risk trends would eventually be unwound through Thursday’s session, but why did the currency first rally before eventually succumbing to disappointment? An argument can be made that Draghi’s reference to options in open market operations is encouraging, the euro’s real relief was in the hold on rates. Swap markets were pricing around an 80 percent probability of a 25 bps cut to the benchmark – a small victory.

In the 24-48 hours preceding the ECB rate decision, some of the expectation for more stimulus had bleed off – tempering follow through on the reversal. From here, a further fundamental slip will likely be needed to usher in a new leg lower. That said, the Euro Zone crisis is not as ready a provider. Greece agreed to its €11.5 billion budget cuts and Spain has delayed its bank review. Draghi may have bought more time after all.

British Pound Finds No Relief from ECB Crisis Fight, BoE Policy

Given the headline space dedicated to the ECB and its President Draghi’s build up, there was a considerable distraction from what the Bank of England would do with its policy Thursday. The decision to keep the benchmark rate unchanged at 0.50 percent and the bond purchasing program at £375 billion ensured that the market would check out and follow the euro waves. That shouldn’t go unappreciated though for sterling traders as the Euro-area decision not to offer more stimulus leaves the channel for crisis spread open. We will come back to the BoE decision next week when the group releases its updated growth projects in the Quarterly Inflation report.

Australian Dollar Tries to Cling to Data to Offset Risk Headwind

Australian and Chinese data stirred the Aussie dollar this morning and yesterday; but between the event risk, heavy risk flows ensured the currency reverted back to its more elemental position in the FX market – as the top carry currency. Taking stock of the data however, it is worth noticing that Australian exports stagnated while retail sales jumped 1 percent – suggesting a growing dependency on domestic strength. This morning the data was less balanced with a slowing in Chinese service sector PMI accompanied by a contraction in Aussie services.

Japanese Yen Outperforming Dollar in Low Volatility Risk Aversion

Finance Minister Azumi was on the wires once again Friday morning with depressing comments that he couldn’t be optimistic about the fiscal outlook and that a rise in yields could cause problems. He has a point. BoJ Governor Shirakawa warned last week that a 2 percentage point increase in yields could lead to 7.3 trillion yen in losses for the region’s largest banks. However, fiscal problems are still not enough to undermine the yen’s advantage over the US dollar for preferred safe haven status. With implied volatility levels low, basic carry unwind trumps liquidity.

Swiss Franc: Swiss Yields a Timely Sign of Pressure on EURCHF

It can be difficult to assess how much pressure is being placed on the SNB in its effort to maintain the 1.2000 floor below EURCHF. The mid-year report from earlier this week offered a valuable update (FX reserves of 62 percent of GDP and 60 percent of that euros), but it isn’t exactly timely. Another good measure is short-term Swiss bond yields. The dive to a record low 2-year yield (-0.45 percent) gives a distinct read.

Gold In a Four-Day Tumble after Both Fed and ECB Deny Stimulus

With the ECB’s decision to not expand its balance sheet and further devalue its currency, gold lost its second chance this week to gain significant traction over fiat currencies as a store of wealth title. The four-day decline is the longest strength of losses for the precious metal since May 16 (before it bottomed out). This is not a case for an immediate reversal, however…nor follow through. We are still in congestion.

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

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