DailyFX

Forex: Dollar Presents Greatest Breakout Risk in Four Months Ahead of NFPs

John Kicklighter

Talking Points:

  • Dollar Presents Greatest Breakout Risk in Four Months Ahead of NFPs

  • Japanese Yen Crosses Rally but Trend as Uncertain as Nikkei 225 Climb

  • Australian Dollar Rallies after RBA Skips ‘Scope’ Language for Further Cuts

Dollar Presents Greatest Breakout Risk in Four Months Ahead of NFPs

There is a clear divide in the dollar’s performance so far this week. Weakness against the ‘investment’ currencies and strength against the others shows us the divide. The greenback is a safe haven currency in a market that isn’t pining for liquidity. We can see that clearly enough in the Dow Jones Industrial Average’s (Dow) refusal to budge from its 150-point range perched dangerously above another feeble level of support. That said, the risk of a shift in speculative positioning is more palpable now than it was a few months ago. Not only is leverage holding at record highs while trading volume in the traditional equities market this past week drop to a 15-year low; but we have already seen a redistribution of risk around this critical benchmark. Given the tumble in the Deutsche Bank carry index, torrential outflow from the emerging market and even unwinding in Fed front-run trades (US Treasuries and mortgage-backed securities); we are looking at dry dynamite.

A potential tide change, however, is not something to be traded. The dollar has benefit from the surrounding markets’ repositioning, but the true fear that would be presented in a systemic exit from ‘risk’ is what the currency needs to extend its progress. The next serious catalyst to this theme is Friday’s labor data as the market has essentially priced in the September 18 Taper. Looking beyond the first move and realizing the OECD’s fears of the US central bank’s withdrawal of support causing panic with a consistent disarming would offer the ideal environment.

Japanese Yen Crosses Rally but Trend as Uncertain as Nikkei 225 Climb

The yen crosses are up across the board so far this week. There are two considerations to take account of for these pairs: the level of risk appetite and the level of carry the crosses provide. Following the lead of US Treasury yields, we have seen the developed world’s sovereign level rates soar over the past weeks. While this is the growth-led carry traders look for, it nevertheless provides an increase in return. The real boost though comes via risk appetite trends. The Nikkei 225’s surge Tuesday forced a bullish breakout that looks a lot like USDJPY’s…

Euro: OECD Eurozone Growth Forecasts Improve but Uncertain Remains

The OECD (Organization for Economic Co-operation and Development) updated 2013 growth forecasts, and Europe was generally the benefactor. Against a moderation in expectations for the US and China, Germany and France enjoyed hearty upgrades to their growth prospects – the latter actually turning from an expected contraction to expansion. Yet, like most other Euro fundamentals, this is inert support. A true recovery to competitive levels is years away and a slip back into crisis easy to suffer. Notably, we will watch Italy’s political situation.

and

Recommended Stories