Dollar Climbs a Third Day as S&P 500 Starts an Early Stumble
The Dow Jones FXCM Dollar Index advanced for a third day through Tuesday. While encouraging for the currency, conviction remains as timid as the S&P 500’s retreat from record highs. Looking for more robust fuel to feed the greenback’s charge, the economic docket comes up light when it comes to feeding relative growth or Taper interests. The calendar this past session was sparse with a NFIB small business sentiment survey hitting an 11-month low, and the forthcoming session is even lighter. The dollar’s best bet for a strong drive – bullish or bearish – remains risk trends. That said, the medium-term (1-month) FX volatility reading is just off 14-month lows.
New Zealand Dollar Volatility in Focus on RBNZ Hike
If your objective is to seek out volatility, there is no better place to find it over the next 24 hours than form the New Zealand dollar. With the currency pushing up to the 10-month 0.8500 range highs it has established against the greenback, we are well ready to absorb the RBNZ rate decision. To say a hike is expected would be an understatement. According to swaps, themarket has fully priced in a 25 bp increase to the benchmark to 2.75 percent. Given the conviction in this outcome, its absence would likely spark a sharp decline for the kiwi. Yet, those forecasts aren’t haphazardly formed. Governor Wheeler has nurtured rate expectations when he projected 225 bps worth of hikes through 1Q 2016. The important factor with this particular policy event is not the milestone of its being the first of a new rate regime but whether it fosters speculation of a steady and progressive policy of tightening moving forward. If further hikes are not easily obtained, the carry premium will unwind.
Yen Crosses Retreat After BoJ Pulls Back on QE Reins
There is still enough expectation in the market that the Bank of Japan will upgrade its open-ended QE program in the near-term that its absence could feed a reversal in the yen crosses – if not trigger a turn itself. Via standard channels of fundamental drivers, there may be a buoyancy in risk assets due to the broader ‘reach for yield’, there is very little carry to be found here. That is incompatible with the relative multi-year highs on these crosses. With BoJ Governor Kuroda remarking no changes in policy were needed as they approach their CPI target, doubt is seeping in.
Euro Traders Weigh Rate Outlook as Yields Rise, OECD Calls for Stimulus
Market-based yields are the practical application of interest rate forecasts for traders. In this low rate environment, yield forecasts are the active drivers for the major currencies; and we have seen substantial progress on that front for the euro. Over the past week, we have seen the three-month Euribor climb to its highest level since August 2012. This advance from the lows set in December of that same year fit the EUR/USD’s progress rather well. Yet, is this enough to push the benchmark pair to 1.4000 and beyond? Bearish speculation of further ECB stimulus has slipped significantly after last week’s ECB hold, but the external criticisms are rising. Tuesday, the OECD called for moreQE.
British Pound Hike Hopes Continue to Fade after BoE Testimony
The GBP/USD has retreated to 1.6600, but the pair has yet to commit itself to a major reversal after stalling out below 1.6800. This pair in particular highlights a key fundamental theme for the sterling – rate expectations. While the UK rate outlook has surged in the past 8 months alongside the turn in the economy and drop in unemployment, we have seen conviction and evidence ebb in recent weeks. This past session, the NIESR GDP estimate for February and manufacturing activity report for January offered little fuel for the speculative fire one way or the other. However, BoE Governor Carney and some of his fellow MPC members weighed in on rates at their Parliamentary testimony. Carney repeated his warning on hike expectations but also voiced support to a 2-3 percent medium term range after the hikes begin.
Copper Collapse Drives Metal to Three-a-Half Year Low
In the commodities market, there are few recent moves that rival the incredible tumble copper has suffered since Friday. To this morning’s lows, the metal has dropped over 8 percent on Comex futures trading. For activity measures, volume behind this tumble has surged (thought it has not overtaken the November 13 peak). Now testing lows around 300 going back to August 2010, traders are weighing whether this sharp drop is exposed to a more substantive bear trend. As the four-year low in Shanghai’s benchmark copper futures contract reflects, the concern seems to be originating from China. The plunge began on Friday after the government held its hand as the first on-shore bond default passed. While the credit market implications this event carries do not yet seem a market-wide financial concern, the manufacturing activity implications seem to be feeling the pain. The question is whether copper confirms a more destructive bear trend and China problems evolve into global ones.
Emerging Markets Showing Heavier Risk Seas – A Warning Sign?
On the risk curve, the emerging markets are the first stop for the fear-greed balance. So while the FX benchmarks for speculative appetite may not be engaged in a strong sentiment drive one way or the other, the EM group is showing us the waves that can reach the core a little later on. Looking at the broader segment, the MSCI Emerging Market ETF dropped 1.1 percent this past session on a modest pickup in volume. From the FX-side, a few very modest gains (from South Korea’s, Taiwan and Philippine currencies) were more than outweighed by hefty declines from the likes of the South African Rand, Brazilian Real and Mexican Peso. Aside from this group’s risk barometer function, we are watching Ukraine again today. Parliament has given Crimea until today to drop its referendum to join Russia or it will dissolve the region’s assembly.
Gold Overtakes $1,355 – How Much Run do the Bulls Have?
While the US dollar is up for a third straight day, it doesn’t seem to be stopping gold. Following a modest performance (up 0.7 percent) within its general $1,350 to $1,325 range this past session, the precious metal seems to have found enough drive in early Wednesday trade to push the market to a fresh five-month high. Yet, just like the prominent moves of equity indexes and FX pairs, the issue is not in the initial technical break but the conviction of follow through. Pushing the $1,350 boundary fits the general 2014 trend, but it doesn’t come on a strong fundamental basis. We don’t have a material decline in broader ‘fiat’ assets; price pressure concerns are still tipped into the deflation category; and the while we have a slight ‘risk aversion’ lean, it isn’t the severity needed to engage this safe haven over others. As such, we are still running on speculative appetite. On that front, ETF volume is up modestly and futures open interest is just off an 8 month high. Far from trend-worthy.