DailyFX

Dollar Steadies but Doesn’t Turn Away from 1.3100

John Kicklighter

  • Dollar Steadies but Doesn’t Turn Away from 1.3100

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  • Swiss Franc Rallies after SNB Holds Monetary Course

  • Australian Dollar Finds Last Second Save from Chinese Data

  • Gold’s Luster Dims with Another Last Second Greece Rescue

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Dollar Steadies but Doesn’t Turn Away from 1.3100

The past 48 hours have offered fundamentals that bolster risk appetite, financial stability and the US money supply. In sum, the dollar’s strength should be significantly eroded. However, through the close of this past session, the greenback actually rose against most of its counterparts. From the Dow Jones FXCM Dollar Index (ticker = USDollar), the benchmark put in for its first bullish close in four trading days. That is both a reflection on the reserve currency as well as the backdrop market conditions. We must certainly be dealing with remarkable conditions, however, if a fresh wave of Fed stimulus and the withdrawal of the world’s most frequented threat (a Greek collapse) can’t pummel this safe haven.

What is most remarkable is the lack of follow through following the announcement this past Wednesday that the Federal Reserve had introduced another leg to its stimulus regime - a $45 billion-per-month Treasury purchase starting with the new year…or is it? When we look back to the market reactions immediately following new stimulus programs, the reaction has proven inconsistent and generally net bearish for risk. In the past two years, the S&P 500 has shown positive build up to the Operation Twist (1.1 percent in the week preceding), Operation Twist extension (3.3 percent) and QE3 (0.3 percent). Yet, the aftermath has offered a different perspective: after Operation Twist a 2.2 percent drop in a week; the Extension spurred a 2.8 percent tumble, though QE3 offered a 1.7 percent climb (it is worth noting that it jumped 1.6 percent the day after). What does all this tell us? Anticipation builds as investors see stimulus producing an eventual bid that they can move ahead of – slowly raising the bar on what it means to ‘beat expectations’. When the event passes, speculators have already moved; leaving little more than profit taking.

Expectations set the scene for fundamentals, but there is also a heavy contribution through backdrop market conditions that helps stabilize the dollar. Heading into the end of the year, the natural withdrawal of speculators further exacerbates speculative participation at 15-year lows (measured through S&P 500 futures open interest). There is slight ‘risk on’ bias associated with a withdrawal of such positioning, but that isn’t as influential for the dollar as the curb that this exit has on trend development. Without market depth, these ‘positive’ outcomes can offer little more than a relief rally for capital markets and modest weight on the dollar. Will this same set of circumstances hold for the Fiscal Cliff as well? The worst-case scenario for this particular threat draws a little more fear from the masses. However, expectations of a deal can already be seen.

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