Commodity Dollars Soar as Risk Trends Gyrate Before ECB, NFP Results

Talking Points:

• Commodity Dollars Stage Recovery as Risk Appetite Firms Before ECB, NFP
• Euro to Resume Decline on Strong ECB Stimulus Pledge, Rebound Otherwise
• See Economic Releases Directly on Your Charts with the DailyFX News App

The sentiment-linked Australian, Canadian and New Zealand Dollars outperformed against their leading counterparts in overnight trading hours. The Kiwi proved strongest on the session, rising as much as 1.4 percent on average against the majors. The Aussie and Loonie added 0.6 and 0.8 percent, respectively.

The move did not appear to be rooted in any single catalyst. Rather, price action probably reflected a move toward “neutral” on sentiment trends within the FX space as traders brace for the week’s top event risks to cross the wires. The spotlight initially falls on a policy announcement from the European Central Bank and moves to US Employment figures tomorrow.

The central issue remains the continuity of the “risk-on” theme entrenched since mid-2012 and arguably driven by generous Fed stimulus is able to be sustained after the US central bank concludes QE3 asset purchases later this month. For the ECB, that means investors will want to see evidence of a big-enough accommodation effort able to replace that of the US central bank on the horizon.

So far, the markets have been decidedly underwhelmed by the easing measures that Mario Draghi and company introduced in recent months. This is not surprising: uptake on the ECB’s first TLTRO operation fell short of expectations and the central bank’s balance sheet is only a hair above a three-year low. If it is to underpin risk appetite in earnest, the Eurozone monetary authority will have to do far more.

With that in mind, the markets will be most keen to hear details of the ECB’s planned purchases of ABS and covered bonds. Against this backdrop, the overnight swell in risk appetite probably reflects the perceived threat of holding bets against sentiment-linked assets in the event that the ECB delivers. That would mean a commitment to large-scale uptake of securities and a strongly-worded pledge to do more if need be. A lackluster outcome may quickly send sentiment-geared FX back down however.

As for the Euro itself, the single currency’s reaction to whatever the ECB unveils may prove to be a bit more straight-forward. The promise of an aggressive expansionary push is likely to sink the unit against its leading counterparts. Alternatively a more modest effort may trigger liquidation on highly elevated speculative net-short positioning and foster a rebound.

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--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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