Dollar Avoids Tumble But Market More Critical Of Fed’s QE3 Talk

There was a bevy of Fed speakers this past session, but growing support of ‘tapering’ the central bank’s stimulus program (QE3) didn’t seem to generate much additional strength for the greenback. While speculators are certainly tuned into the serious consequences should the policy authority turn the boat around, we may have reached a saturation level where the dollar bulls and risk bears need a material escalation of this threat / opportunity.

Looking over the highlights from the newswires Thursday, we see clear support for pulling back on the stimulus that has spurred moral hazard and watered down the value of the greenback. The Fed’s Plosser called for an easing of the purchases starting in June and full stop by year end, Williams echoed those sentiments and Fisher took it further discussing the risks the program was inviting. These are compelling comments. The only problem is that these FOMC members aren’t voters. They can only influence from the sidelines. The majority of those that are weighing in on US monetary policy are far more reserved and neutral. Should a key ‘fence-sitter’ like Bernanke, Dudley or Yellen support the cause; it would probably represent the kind of escalation that finally cracks moral hazard in benchmarks like the S&P 500.

Euro: Officials Lay Out Risk While Bond Auctions Take Advantage
European officials are still – rightfully – concerned about the health of their economy and financial system. In fact, some are concerned enough to suggest aggressive and dubious policy measures. This past session ECB member Liikanen further undermined the belief that Cyprus’ unorthodox rescue would be a one-off.

The central banker suggested that ‘bail-ins’ should now be the standard and bailouts should be the exception. It may seem a reasonable call in current market conditions, but it is dangerous as it means future rescues will involve losses for investors in unsecured accounts. And, Europe needs durable market confidence desperately. Taking it a step further into the currency war realm that no policy official seems to want to admit is going on, Europe’s Industrial Commissioner stated the currency was too high and the ECB should manage it. Nevertheless, yields are still low and Italy managed to sell 30-Year bonds while the ESM raised €5 billion for 10-years.

Japanese Yen Gains Little Traction after Strong GDP but JGB Yields Ease
Is the Bank of Japan pursuing its aggressive stimulus effort in a bid to spur growth? While it is certainly a hoped-for side effect, the central bank is really implementing its bold measures in a bid to end deflation first and foremost. That knowledge has likely defused a more substantial response from the Japanese yen to this past session’s 1Q GDP figures.

The world’s third largest economy grew a faster than expected 0.9 percent through the three-month period and accelerated its clip on an annualized basis to a one-year high 3.5 percent. This will help preempt Prime Minister Abe’s ‘third arrow’ in his policy plan to bolster growth. However, the yen crosses are not running on growth. They are fed by carry interest and that means risk appetite. The volatility in the Japanese Government Bond (JGB) remains a serious concern. Despite the recent drop in the 10-year yield, the more than 50 percent surge in recent weeks highlights the difficulty that Japan may face with its stimulus.

Australian Dollar Tumbles as 10-Year Yields Reverses Carry ReboundThe Aussie dollar has crashed through further, important technical support this past session. For AUD/USD, the selloff is now over 600 pips having taken out 0.9850. The other high-profile break comes from AUD/JPY which is has finally slipped below 100. These two pairings are somewhat misleading of the currency’s individual standing, however, as they follow ‘risk’ themes. But, when we look at the tumble for AUD/CAD, the most consistent rally in GBP/AUD in six months and EUR/AUD’s break above a multi-year falling trendline; we are offered a better view of its individual pain. Looking through traditional venues, we see that swaps’ rate forecast is sliding again, the ASX 200 is trailing the Nikkei 225 and the benchmark government 10-year bond yield has gapped lower.

However, the real weight is harder to identify. We are seeing divestment from those ‘committed investors’ (central banks, passive funds) that were diversifying into the high-yield currency.

New Zealand Dollar Suffers Most after GDP Forecast Downgrade
If a currency is outpacing the Australian’s dollar’s embarrassingly aggressive decline, it must be under considerable fundamental pressure. The New Zealand dollar (kiwi) eased only 0.13 percent against its Aussie counterpart, but the losses were far heartier versus the rest of the majors. This performance may confound those just looking at the docket as the manufacturing activity report released early Thursday showed strength. Yet, the real interest rests with the Federal Budget. According to Finance Minister Bill English’s assessment, the economy will only grow 2.3 percent in the 2013-2014 period, following initial expectations of 3.0 percent growth. Interestingly enough, the evaluation also projected that the kiwi would remain ‘high’ through 2013 and 2014.

British Pound Puts in for Universal Advance in Wake of BoE Minutes, Jobs
There are no notable economic indicators scheduled for release over the final 48 hours of this trading week, but that hasn’t weighed the sterling. In fact, the currency put in for a universal advance this past session ranging from a 0.25 percent climb against the Swiss franc to a 1.26 percent rally versus the motivated New Zealand dollar. There is no doubt carry over strength from the previous trading day when both economic assumptions improved and stimulus expectations cooled. The sixth consecutive monthly drop in jobless claims has added traction to the improved 1Q GDP number released in late April. On similar grounds, the BoE’s minutes’ forecast for 0.5 percent 2Q growth and upgrade to 2014 forecasts cools speculation of the imminent stimulus ramp once Mark Carney arrives to head the central bank.