Volatility looks as if it is charging to life for the majors as price action takes out major technical levels to set up the fundamentally intense week ahead. In the low liquidity environment over Thursday and Friday of last week, big moves were easily leveraged in the currency markets.
However, now that American and Japanese market participants are back at their screens, the filled out ranks are making an attempt at stabilizing the dollar before the economic calendar can dictate a more reliable direction. Against the euro, the greenback plunged to a new 20-month low, to 1.3180, in the opening hours of Asian session trade. Since then, the pair has fallen back to 1.3085, but most action seems contained by the 1.31 figure. The break in the British pound paring was even more interesting as a 23-month high for GBPUSD has clearly taken out previous resistance. A 1.9470 high has gradually given up 165 points of its three-day advance, but 1.94 now seems the level of interest to balanced market forces. Not to be ignored, the Swiss franc took advantage of the dollar sell off to move all the way to 1.2015 against the dollar, a five-and-half month low. With the least convincing move, the USDJPY has rebound from three-month lows at 115.40 in the early trading hours back above 116 for the first green bar for the dollar amongst the four.
The landscape for the FX markets may have shifted for the long-run with the accumulated effects of economic indicators, technical formations and capital flows. From a technical standpoint, the dollar has been pushed to new lows against many of its most liquid majors. Most notable amongst the dollar contractions were the EURUSD, GBPUSD and USDJPY pairs. Some level of caution remains however in the dollar index; which, though breaking 84.25 support in the most recent run, still has to deal with a floor eyed at 83.50. On the other hand, clearing the initial hurdles in the majors may have tipped the scales and provided the market the ability to build momentum in bigger runs. Whether this is the case or not will also be reflected in measures of current market volatility as well as implied volatility. The thin liquidity last week was undoubtedly the trigger the technical fireworks, with fewer traders able to leverage a strong rally. Now that the market is back to full capacity, it will remain to be seen whether the market volatility will retain its new levels with new trends forming after the recent breaks.
The economic calendar set for this week could play a big hand in helping the market decide its level of activity. Though there were no scheduled economic releases on board for Monday, the dollar was already feeling the fundamental effects of holiday spending. As the final two months of the year account for an estimated 20 percent of annual sales, the strong reports have set up high expectations for November and December consumer spending indicators like the governments personal spending and retail sales gauges. According to a recent poll, holiday spending was 19 percent higher than a year ago. Looking ahead, it doesnt take long for the data dam to break. Tomorrow, the register includes reports of durable goods orders, consumer confidence and existing home sales. Durable orders are expected to print lower in October and consumer sentiment higher in the following month; but housing may prove to be the defining read for the day as the specific market looks to define spending, wealth and overall growth in the economy in the coming months.
With the dollar plunging in the final days of last week, the equities market had its turn at the chopping block Monday morning. By 16:25 GMT, the Nasdaq Composite was leading the broad decline with a 1.67 percent drop to 2,419.15. Less severe, the Dow was off 1.01 percent to 12,156.48 while the S&P 500 sank 0.92 percent to 1,388.13. From the long list of active movers, a few ticker symbols were making for dramatic headlines. From F, For Motors Co., an announcement that the automaker would borrow $18 billion by year end to fund restructuring and cushion the firm from a potential recession sent share value 3.1 percent lower on a $0.26 drop to $8.26. Blue-chip Wal-Mart (WMT) was contradicting the strong holiday spendings reports from across the nation with its same store sales report for November. According to its measurements, same store sales for the month fell 0.1 percent, the first contraction since 1996. In response to the news, traders pushed the stock $1.01 or 2.1 percent lower to $46.89.
Treasury markets were little moved by mid-day trade Monday as debt many traders deferred placing positions until after tomorrows data releases begin to hit the wires. The t-note was trading 4/32nds lower at 100-15 of face with yields up 2 basis points to 4.564 by 16:25 GMT. Longer termed bonds were 6/32nds off at 97-23 as its own yield slipped a single basis point to 4.643.
