The relationship between the dollar and risk seems to have changed. Where as before the dollar tended to rally on risk aversion whether caused by European Sovereign debt wobbles or home grown risk, record low yields on US treasuries coupled with fears of a double dip recession have broken the relationship. The dollar is not now being viewed as much of a safe haven and the assumption by many analysts is that the dollar will respond positively to good news. Nevertheless the relationship is not even as clear cut as that. Recent negative news including lower Durable Goods Orders and a less optimistic Beige Book for July have left the dollar broadly unchanged. Today’s lacklustre initial jobless results whilst not considered a particularly market moving-metric also failed to effect the currency. The churning unresponsiveness of the dollar may well be a sign it is in the process of reversing the recent decline. Watch out for a surprise GDP figure tomorrow , which may be the catalyst required to set in motion another rally. At midday GMT the dollar was trading at $1.3084 to the euro and $1.5643 to the pound.

   European equities rallied this morning after positive earnings reported by Siemens AG and BASF SA,  on the back of which the euro also rose slightly. On the data front German unemployment stayed more or less unchanged, as were most of the other Euro-zone metrics published today, although the euro-zone business climate indicator showed a fairly substantial increase from 0.5 to 0.66 whilst a fall had been forecasted and euro–zone economic confidence was also slightly higher at 101.3 after 99.0 last month. The market seems to be bidding its time at the moment waiting for the next big story as usual themes persist: viz Europe appears to be out of the worst of it for the moment, with the Sovereign debt hole plugged and the stress tests out of the way; nevertheless the churn at the 1.30 mark on EUR/USD is not a healthy sign and could be indicative of a sharp correction on the cards. At midday GMT the euro was trading at $1.3084 against the dollar and £0.8362 to the pound.

   Despite disappointing data the pound continues to climb though at a more mute rate than before. UK house prices were down, according to the Nationwide survey, by -0.5% MoM, whilst a fall of -0.3% had been expected. Consumer Credit and Mortgage Approvals were also down although not dramatically. At midday GMT the pound was trading at $1.5643 to the dollar and ¥135.80 to the yen.

   Seems like spotlight is on the yen as new regulations are introduced prohibiting excessive leverage in the retail FX market and a welter of high profile economic metrics are released later today. This morning the yen was uncharacteristically managing to rise despite the continued trend by investors to support risk. This may be as we near the 1st August, the deadline for the introduction of new legislation to limit leverage for retail foreign exchange clients. The retail market makes up almost 50% of Japan’s FX turnover and many investors will be forced to liquidate positions in order to comply with the new maximum leverage levels of 50:1. This is forecasted to trigger a lot of residual yen buying. Investors will also be eagerly awaiting a welter of important Japanese economic news releases latter today including CPI, Jobless Rate and Household Spending. These may well move the yen considerably, so for volatility this may be the currency to ride. At midday GMT the yen was trading at ¥86.82 to the dollar and ¥113.58 to the euro.

Analysis prepared by:

Joaquin Monfort
Forex4you analyst