Dollar Climbs as Risk Eases, Slump in Correlations More Interesting Though anti-Euro and anti-risk sentiment have not yet developed into heavy trends yet, the two fundamental themes have effectively traded off these past weeks to afford the US dollar a meaningful advance. To see the influence of this trade off, we can refer to the performance of EURUSD and AUDUSD over the past two weeks. This past week, AUDUSD has taken the lead with a slide that reflects the same risk-aversion theme that has pulled the benchmark S&P 500 Index back from multi-year highs. During this same time, EURUSD was little moved. That is very different from where we were two weeks ago. Turning back the clock further, we found that AUDUSD was dithering while the FX market’s most liquid pair was sliding on concerns surrounding the Euro-area crisis. Ultimately, this has been an effective trade off for progress from the greenback, but this haphazard mix is less likely to provide a strong trend. Yet, perhaps there is something more in these correlations… For weeks, months and even years past, the FX market has followed dominant fundamental themes (risk trends, Euro crisis fears, expectations for stimulus) to great effect. In fact, most of the real trending that we have seen in currency and capital markets can trace its origin back to these dominant subjects. So, what will revive the larger tide? We have seen benchmarks overlook disappointing earnings (S&P 500), the approval of the second Greek bailout (EURUSD) and signs of a global slowdown in growth (everything). The fuel may be there, but the spark continues to elude us. However, perhaps speculative interests themselves are close to reengaging the markets. Not only have we seen EURUSD and AUDUSD tread different courses, but there has been a loosening of correlation across many different risk-synced assets. Is this the sign? Euro Stability Causing Unease as Fitch and IMF Remind Risks Still Present EURUSD has been relatively quiet this past week. That wouldn’t be a remarkable observation if it weren’t for the fact that general risk trends (S&P 500 and AUDUSD acting as standards) weren’t sliding and had we not just learned that Greece was approved for its second bailout. There are times when stable market conditions are worrying. So, what does this departure from fundamental reality mean? If we consider the time tables of the euro’s performance over the past weeks, we can unravel this mystery. Last week, the euro was far more active as speculation leading into another make-or-break weekend for Greece took the initiative. With the EU ministers’ approval of the 130 billion euro program, it would seem that there would be a relief rally to follow. However, such an outcome seems to have been priced in. And, more importantly, skepticism that approval and implementation were separate concerns remained. This past session, we were reminded that averting an immediate crisis doesn’t solve long-term problems. Of note, Fitch downgraded Greece’s credit rating from CCC to C (just above default) with the note that a near-term default was highly likely. Perhaps more remarkable, an IMF official remarked on “huge� implementation risks with Greece. British Pound: Will the Cable Hold On to its Post-BoE Minutes Losses? I wasn’t expecting the Bank of England’s minutes to be as market moving as they ultimately were. The group’s decision to boost the bond purchasing program by £50 billion roused little surprise from sterling traders while the Quarterly Inflation report released last week defined the outlook for growth and interest rates. Nevertheless, the knowledge that two of the MPC’s ranks (Posen and Miles) had voted for a larger slug of £75 billion would send the pound tumbling. This question now is whether the sterling will maintain this big shift. While the stimulus outlook certainly has an influence over the pound’s perceived strength, themes of risk appetite and the spread of the Euro-area financial crisis are far more critical. In the absence of drive behind these themes, we would see the change in stimulus forecasts absorb quickly and the currency retreat to the underlying trends. Should risk or Euro concerns explode, it would simply hasten the regression. Japanese Yen Takes Another Tumble against Dollar Regardless of Risk Trends USDJPY seems unstoppable. Despite a downshift in risk trends (not a true decline), the benchmark pair would continue its surge. At this point, the yen has dropped against the greenback in both ‘risk on’ and ‘risk off’ scenarios. Of course, if we line the Japanese currency against more yield-intensive counterparts, the tendency is to return to risk appetite trends. In the absence of that overriding catalyst, their gains continue. This is a long-overdue move and the fundamentals support its continuation over the long-term, but be wary of natural corrections. Australian Dollar: Political Uncertainty Can Add to an Unfavorable Yield Situation The political situation in Australia is in flux. Following the surprise resignation of Foreign Minister Kevin Rudd, we find Prime Minister Jullia Gillard struggling to maintain control of the Labour party at a time when their popularity is on the ropes. Is this a critical concern for Australian dollar traders? Not really. While uncertainty is rarely a positive for investment, there is little immediate risk that the currency’s position will change as the high-yield player amongst its colleagues. Of course, if the general trend is towards risk aversion, this just adds another issue. Swiss Franc Helps Shape Euro Skepticism, EURCHF Refuses to Climb Though there is still a clear sense of skepticism surrounding a tidy recovery from the Euro Zone’s financial troubles, there is still room for relief. And yet, the euro can’t gain traction against its most direct safe haven: the Swiss franc. If you’re looking to gauge the market’s assessment of the euro situation, EURCHF will arguably offer the truest reflection. That said, the persistent appreciation of the Swiss currency is a true burden for monetary policy makers. If this is what is happening when conditions are ‘improving’ what happens if the Greek effort falls through…

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