There wasn’t much working in the dollar’s favor to start the week; and the selling momentum from last week would keep the benchmark currency under pressure. Yet, looking ahead, there is a round of heavy event risk on the docket. And, while this wave doesn’t necessarily guarantee a favorable outcome for the greenback; the mere threat of an aggressive reversal will be enough to curb bearish conviction. This should suit most dollar-based majors just fine. Looking across the field, most of the liquid currency pairs are currently trading within stable ranges. GBPUSD, AUDUSD, USDJPY and USDCAD are among those pairs that are well within the highs and lows of their respective ranges of the past few weeks. The notable exception of course is EURUSD. Having rallied 9 of the past 11 days, the world’s most liquid exchange rate has covered approximately 700 pips and generated a meaningful bull trend. By comparing the relative progress of the euro-based major and its counterparts, it becomes clear that the former is heavily responsible for the weak performance of the Dollar Index itself these past few weeks. That being the case, should EURUSD throttle back; the dollar could regain its balance.
Through Monday, EURUSD’s tempered climb encouraged FX traders to flesh out fundamental concerns both taking place and just over the horizon. A terrorist bombing in Moscow and suggestions that the PBoC (People’s Bank of China) was trying to pump 300 billion yuan of liquidity into its markets could have stoked fear of the unknown and subsequently driven capital into the safety of the United States’ liquid markets. Instead, risk appetite measured in equity market benchmarks across the US, European and Asian sessions would paint a remarkably robust picture. It is difficult to pinpoint the source of the market’s optimism at any one point; but there certainly is a backdrop for short-term speculation in the persistence of supportive stimulus. Another Permanent Open Market Operation (POMO) by the Federal Reserve Monday injected $8.9 billion into the markets – and it should further be noted that a good portion of this purchase was completed using government debt that was just recently auctioned. Not only does this provide cheap capital and naturally depress the currency; it further looks like monetization of debts.
Unmitigated dollar selling is likely to ease up in the near future. Declines from here will be more dependent on the correct outcome from specific event risk. This can be partially encouraged by exogenous event risk; but that will be difficult given the influence of upcoming US-based releases. Over the next 24 hours, the Richmond factory activity index and housing inflation data from FHFA and S&P / Cash-Shiller will take a backseat to the straight-forward impact of the Conference Board’s consumer sentiment survey. That said, we shouldn’t expect a very large shock from any of this data. Though there is little change expected from the FOMC policy group come Wednesday; the influence that such a low probability scenario would have is too great to ignore. That said, we will have a distracted market on our hands.