• Dollar Tumbles Across the Board as Risk Appetite Climbs on Strong Global Manufacturing
  • Euro Firms on Speculation on Bailout Provisions, Looking Forward to the Portuguese Bond Auction
  • British Pound Rallies as Hawkish Rate Speculation Meets a Record Manufacturing Report
  • New Zealand Dollar Elevated ahead of 4Q Employment Data
  • Australian Dollar Rallies Alongside Equities, What Impact Can Cyclone Yasi Have?
  • Canadian Dollar Finds Encouraging - or Speculative - Words from a BoC Member

Dollar Tumbles Across the Board as Risk Appetite Climbs on Strong Global Manufacturing

What chance there was for a meaningful risk aversion move to offer relief from the market's overleveraged position these past months was dashed Tuesday with a strong follow-up rally in sentiment. And, considering the dollar has few enticing fundamental traits outside of its role as a safe haven currency; the subsequent swell in optimism forced the greenback to a fresh two-month low. Looking for the source of the benchmark currency's disappointing performance so far this week, the best reference point is the S&P 500 (one of the favored gauges for speculative positioning). From Friday's tentative break from its otherwise implausibly consistent rising trend, the index has surged over 33 points to not only push it back within its bullish groove but further set new a fresh two-year high. Interestingly enough, we have seen similar instances of strong opening rallies for the month from the S&P 500 in September, November and December; and with each of these occurrences, momentum quickly faded. Are we destined for the same outcome in February? We will know before this week is out as by keeping an eye on conviction.

In the meantime, the dollar has been pushed to significant lows against most of its counterparts - some more remarkable than others. Perhaps the most discouraging performance comes from EURUSD. Where many of the other majors have yet to establish prominent bear trends for the greenback, this particular pair has advanced to a 12-week high on the back of a nearly 1000-point move formed in little more than three weeks. From there, GBPUSD and AUDUSD have broken free of congestion and are within view of much more significant highs. And, not far behind, the rest of the majors are simply waiting to confirm conviction in either (or perhaps both) risk appetite or dollar selling to see new anti-greenback extremes of their own.

Establishing risk appetite as the weight on the dollar's shoulders, it important to find the root of this optimism - as it can give guidance to where we are heading next. There is a somewhat conspiratorial suggestion that speculative leverage is being added at the beginning of each month through a natural market positioning effort (perhaps mutual fund exposure or some other equivalent rebalancing). This would denote a disconnected fundamental scenario, which wouldn't be too far off the market when we consider the unnatural level of consistency with which equities have climbed. Yet, if we want to follow the tangible route, investor confidence was leveraged Tuesday through the strong showing for global manufacturing. Starting in China with yet another expansionary reading, we would further see the Euro-area factory activity report climb, the UK equivalent hit a record high and the US follow up with its own six-and-a-half year high. At this point, few should be making the mistake of expecting strong point leading to a dollar rally. This currency is far more sensitive to speculative capital flows. Nevertheless, taking a closer look at the ISM manufacturing survey's details, it should be noted that its inflation reading hit a two-year high while the employment component surged to its highest level since 1973. Let's see if this translates into higher overall payrolls in Tomorrow's ADP and Friday's NFPs.

Related:Discuss the Dollar in the DailyFX Forum, John's Analyst Picks: EURUSD is Squashed by Risk, Changing Gears with GBPJPY

Euro Firms on Speculation on Bailout Provisions, Looking Forward to the Portuguese Bond Auction

Make no mistake, the fundamental imbalance in economic and financial health between the European Union's various members will create significant problems through the foreseeable future. However, the market is concerned with the opportunities and risks directly ahead of it. That said, the strong showing in economic data and encouraging speculation surrounding the expansion of the region's bailout efforts has certainly bolstered short-term confidence. Looking beyond the 18-year low in German unemployment and 9-month high in Euro Zone manufacturing, traders were digesting speculation that policymakers were close to agreeing to open the bailout program to government bond purchases via private placements. Now, we turn to Wednesday's Portuguese bill auction (at 10:30 GMT). A failure could roil the euro; but rates have shown significant improvement recently. What's more, though the ECB couldn't fully sterilize its holdings, it didn't have to buy bonds last week.

British Pound Rallies as Hawkish Rate Speculation Meets a Record Manufacturing Report

The British pound was moving at two speeds across the market. Against most of its counterparts, its climb was reserved or non-existent. Yet, for GBPUSD, the sterling's rally was remarkable. For fundamental fuel for this currency (beyond the obvious risk implications), we would see the factory activity report at a record high competing with a drop in mortgage approvals and housing prices. What was really interesting through was the forecast by NIESR (who produces research for the BoE and Treasury) that the there would be three quarter-point rate hikes this year.

New Zealand Dollar Elevated ahead of 4Q Employment Data

Though it doesn't carry the yield-clout that its Australian counterpart enjoys, the New Zealand dollar capitalized on the risk appetite swell to find its way to new highs. Yet, for the kiwi, progress has proven less material; which leverages the importance of Thursday morning's 4Q employment statistics. Given RBNZ Governor Bollard's concern for growth, traders should give this data a closer look.

Australian Dollar Rallies Alongside Equities, What Impact Can Cyclone Yasi Have?

It is questionable whether the RBA's neutral stance had a dovish or hawkish slant to it Tuesday morning (on one hand, it means they will not overact to Flood-based growth concerns; but it also suggests they won't anticipate consequential inflation pressures either). That said, its response to risk trends wasn't ambiguous. Will risk appetite prove buoyant enough offset the threat of Cyclone Yasi?

Canadian Dollar Finds Encouraging - or Speculative - Words from a BoC Member

The Canadian dollar has neither high interest rates nor a particularly robust economic and financial system. Nevertheless, it enjoys the trappings of a high-performance risk appetite currency. The loonie's strength was drew the consternation of the BoC Senior Deputy as a possible hazard for growth ; but at the same time, he noted it would be risky to bet that the currency would weaken in the near-term. Speculator or realist?

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