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Euro Suffers Biggest Drop in a Month on ECB Concerns

Without doubt, the biggest move on an otherwise tame day was tumble the euro suffered Thursday. The uniform decline against safe haven and high-yield counterpart alike (though the former made more progress) tells us this was a performance unique to the shared currency itself. There were a few fundamental highlights – such as news that there is currently 50-55 percent participation in the Greek buyback and France managed to sell debt at record low rates – but the true headline for the day was the ECB decision. We have come to expect the central bank to hold its policy stoically as the financial leaders of the Euro-area try to rein in debts while not strangling growth. That was what opened the market to such surprise for what did occur. While there wasn’t a rate cut (something we discussed yesterday), the policy group did lower its outlook for both growth and inflation. A projection for 2013 CPI to hit 1.6 percent and 1.4 percent the following year, the key reading is well below target. Add to that the financial stability implications of lowering the 2013 GDP forecast from 0.5 percent growth to 0.3 percent contraction, and we have more than just a concern about a future rate cut (lowering its competitive yield advantage). We have a deeper financial / economic crisis.

British Pound Drops Despite Mum BoE, 1.6000 Break Ahead?As has become the monthly standard, the Bank of England announced it would leave monetary policy untouched and offered little more in the way of commentary – leaving the market to await the meeting minutes for detail. Normally, we would consider this a non-event, but we did see considerable sterling selling on the day Thursday. There was some unwinding following the hold – likely concern that monetary policy isn’t offsetting austerity to help along the recovery – but most of the decline came prior to that, after the trade deficit jumped to 9.54 billion pounds.

Japanese Yen: Policy Officials Once Again Try to Wrest Attention from Risk

Japanese Economy Minister Maehara tried his hand at revitalizing the yen selloff Friday morning when he said the government would ask the Bank of Japan for ‘powerful monetary easing’ to help drive the yen lower. The comments were noted and promptly ignored by the FX crowd. We have heard from both the DPJ and LDP their intentions to offer economic through a lower yen, but little action has actually been taken so far. The markets have been duped by lackluster efforts in the past, so evidence and action are particularly important to currency traders.

Canadian Dollar: Watch Local Employment Data for Volatility, Parity Chance

We have the best chance to see the USDCAD hit parity today than anything that we have experienced over the past weeks and months. Consistent with a market that is not prone to serious trends, we should instead look to the combined volatility of the US and Canadian employment figures to spur action from this pair. To carry such a significant rally, we need to see a considerable disappointment on both fronts. A weak Canadian data will spur loonie selling, while a weak US reading would spur the safe have dollar.

Swiss Franc: Watch FX Reserves Data to See How SNB is Positioning

The Swiss franc generally moves in the same direction and with the same momentum as the euro. That is a side effect of a EURCHF exchange rate that is held in place by capital flow from mainland Europe to Switzerland and a 1.2000 floor imposed by SNB force. Of course, with the recent bounce, from this exchange rate, the policy authority has seen significant relief from the constant waves. It will be interesting to see in the November FX reserves data whether the bank used this opportunity to lighten its euro holdings on the market to make room for future assaults.

Gold and Dollar Advance, Correlation Most Extreme in Six Months

One of gold’s primary roles in the market is as an alternative store of wealth to safe havens that are backed by governments (who can alter its value and increase the supply). So, it is an unusual situation when the metal and greenback both rise – as they did the past session. In fact, looking at the correlation between the two (rolling, 20-day), we find that the normally high negative relationship is the weakest we have seen since June. Historically, such a divergence doesn’t last for long. So, who will move to meet the other?

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

To contact John, email jkicklighter@dailyfx.com. Follow me on twitter at http://www.twitter.com/JohnKicklighter

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