- Dollar Breaks Down from Two Month Range, Little Follow Through
- Euro Takes an Unexpected Jolt from Surprise Spain Downgrade
- Japanese Yen Shocked by What was Essentially Expected BoJ Stimulus Expansion
- British Pound Grinds Out its 9th Daily Advance, No 10-Day Runs in Past Decade
- New Zealand Dollar Will Start Coming Under Pressure as Market Fears Rate Cut
- Swiss Franc Pressured Once Again by Spain’s Financial Troubles
- Gold Enjoys its Biggest Jump in Two Weeks on Dollar’s Drop, BoJ Pump
Dollar Breaks Down from Two Month Range, Little Follow Through
We have seen many false breaks and false starts this past week, and the dollar seems to have jumped on the bandwagon as well. Having worked its way into the most congestive pattern seen in over a year, the Dow Jones FXCM Dollar Index was finally forced to choose a direction. And, choose it did a bearish break below 9900. However, just like every other exciting price development we have seen in the FX and capital markets this past week, the greenback’s bearish ambitions dried up almost immediately after the move was made. That said, the slow drift was nevertheless supported by the equally strained fundamentals. Risk appetite trends measured in the S&P 500 overtook resistance on the past two weeks’ congestion. Strength behind the ‘risk on’ run was just as anemic as the fallout from the FOMC decision Wednesday.
The disconnect for meaningful drives in the currency and capital markets isn’t the quality of the fundamental developments we’ve absorbed – especially not this past week. Rather, the trouble is in the general lack of participation we have seen from speculative masses. It is difficult to offer a good measure of participation in the FX market, but we can refer to the long-anemic level of turnover in other benchmark assets (like the S&P 500). A very interesting measure for currency traders though is the FX market volatility index (CVIX) which shows expected activity levels (over the next three-months for those looking for specifics) is at its lowest level since August 2008 – at 9.27 percent. Freely traded markets do not tolerate extremes for long. Though, when manipulation is as common as daily rollover, the abnormalities can last a little longer…
Looking ahead to the final New York session of this trading week, we have another opportunity for major event risk to finally spur some conviction to this painful, schizophrenic volatility. Compared to the Fed’s rate decision earlier this week, the impact potential of the 1Q US GDP report seems far more restrained. The market’s have already been tempered to a slowdown in economic activity globally with the UK recession, lowered European forecasts and moderated expectations for Asia. Perhaps there is some holdout value for the US to rise above it all. If that is a consensus belief, a disappointment could change a lot of expectations and thereby positions. That said, I’m skeptical.
Euro Takes an Unexpected Jolt from Surprise Spain Downgrade
We were given a clear lesson in just how effective fundamental catalysts can be if the markets are caught off guard. This past week, we had to leverage very heavy event risk to squeeze out a moderate level of price action. Yet, on Thursday, an unexpected Standard & Poor’s downgrade of Spain from A to BBB+ drove both the euro and equity futures lower in normally quiet market conditions. Follow through was limited, but that is generally the cut of the market. Nonetheless, we have seen from the market’s reaction to the Spanish downgrade, that there is serious concern that another country has taken over as the top regional concern (until Greece wants to reclaim the crown with its election). This is a good effort to leverage the situation for a potentially bigger drive next week considering we have first quarter Spanish GDP numbers on Monday.
Japanese Yen Shocked by What was Essentially Expected BoJ Stimulus Expansion
We witness some incredibly unusual and choppy price action from the Japanese yen this morning in reaction to the Bank of Japan’s policy decision. There was a fully formed consensus on what would happen with this event – the central bank would fold to government pressure and increase its asset purchases by 5 to 10 trillion yen. The details may have confused some, but the general outcome fit that profile. The central bank actually increased its asset purchase plan by 10 trillion yen (to 40 trillion). They would also extend the program by six months, reduced the credit loan program by 5 trillion yen, extended the JGB maturity targets from 2 to 3 years and maintained the 1 percent inflation target. Back in February, a similar move instigated an incredible USDJPY trend reversal. Now, it barely boosts volatility. The BoJ has been rendered impotent.
British Pound Grinds Out its 9th Daily Advance, No 10-Day Runs in Past Decade
With Thursday’s close, cable (GBPUSD) won its ninth consecutive advance. We have seen runs of similar consistency back on January 19, 2011 and August 3, 2010. Aside from these instances, the past decade is clear of such momentous drives; and there haven’t been any 10-day runs over that period. What does that tell us, the sterling is very likely looking at a correction. That said, the 2.1 percent run to this point is far more restrained than the previous drives 3.4 percent move. Further, these markets aren’t prone to momentum. It could be a lackluster pullback.
New Zealand Dollar Will Start Coming Under Pressure as Market Fears Rate Cut
The FX market seemed to completely ignore the neutral shift in the RBNZ’s policy tone this past week, but we are starting to see its after effects in the interest rates market. According to interest rate swaps, there is a 20 percent probability of a quarter-percent rate cut at the next meeting. Furthermore, the 12-month rate forecast is calling for 6 bps of easing. That may seem modest, but it is the most dovish forecast we have seen in three months. Back in the early days of the Aussie rate shift, the reaction was slow. If global conditions slow, the kiwi could follow the same path.
Swiss Franc Pressured Once Again by Spain’s Financial Troubles
The Swiss National Bank has very few options available to further its effort to devalue the franc. The optimal situation for the group would be for a natural recovery in growth and financial conditions for the Euro-area which curbs the safe haven outflow that directs capital directly to the Swiss banking sector. That looks unlikely as we keep jumping to the next issue for the region. The current approach of unlimited euro purchases will no doubt have a cost limit, and Spain’s downgrade has ratcheted up the spending. What will it take for them to lift the floor or issue curbs?
Gold Enjoys its Biggest Jump in Two Weeks on Dollar’s Drop, BoJ Pump
A key tumble for the US dollar offered gold a spring board for its biggest rally in two weeks. The three-day run the metal is impressive in binary terms only. This commodity is lacking for momentum as surely as its fiat counterparts. Though gold is a safe haven and ideal alternative to inflated stimulus regimes; if there is no follow through on currencies or risk trends, it is unlikely that the metal will gain any additional traction. Watch for any risk trend impact to the upcoming US GDP reading. Without it, gold will likely limp into the weekend.
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Next 24 Hours
BoJ Rate Decision
All eyes to be on whether BoJ increases asset purchases for the second time this year
HIA New Home Sales (MoM) (MAR)
Industrial Profits YTD YoY (MAR)
Could be affected by broader Chinese economic slowdown
MNI April Business Condition Survey
Mixed data expected
Vehicle Production (YoY) (MAR)
Construction Orders (YoY) (MAR)
Annualized Housing Starts (MAR)
Housing Starts (YoY) (MAR)
Expected to remain near highest level since 2007 on robust labor market
GfK Consumer Confidence Survey (MAY)
Expected to reflect ongoing trend of easing price pressures in Eurozone
Import Price Index (MoM) (MAR)
Import Price Index (YoY) (MAR)
Producer Prices (MoM) (MAR)
Producer Prices (YoY) (MAR)
Likely to remain depressed on high unemployment
Consumer Spending (MoM) (MAR)
Consumer Spending (YoY) (MAR)
KOF Swiss Leading Indicator (APR)
Effects of Monti government’s austerity measures still strong
Retail Sales s.a. (MoM) (FEB)
Retail Sales (YoY) (FEB)
US GDP and consumption figures expected to show steady economic recovery; could further weaken the case for additional monetary stimulus measures
Employment Cost Index (1Q)
GDP QoQ (Annualized) (1Q A)
Personal Consumption (1Q A)
GDP Price Index (1Q A)
Core PCE QoQ (1Q A)
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— Written by: John Kicklighter, Senior Currency Strategist for DailyFX.com
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