Dollar Rallies Despite Blow Out S&P 500 Drive

We’ve close yet another incredible day for the S&P 500…and the US dollar. Both benchmarks for risk appetite and safe haven put in for an aggressive push to fresh highs. For the Dow Jones FXCM Dollar Index (USDollar), the tally is now up to four consecutive days of climb with consistent closes at near-three year highs. For the Fed-supported equity index, the 1.0 percent rally to 1,650 was a sharp extension to record highs. At this point, the both currency and stock index are pulling away from conventional risk-based measures. While the S&P 500 finds itself severely removed from record low, global benchmark rates; the balance between return and risk hasn’t materially declined in recent days and weeks to justify the astonishing move the reserve currency has put in. Once again, we are reminded that the environment for sentiment hasn’t fundamental changed – rather the standard ‘risk on / risk off’ theme simply isn’t driving the boat. It’s stimulus.

Investor sentiment is a global theme. While the Federal Reserve was one of the first central banks to move aggressively to expand its stimulus regime aggressively, it isn’t the only one. As the Bank of Japan commits to an active – and massive – stimulus program, the European Central Bank moves towards an open-ended regime and Bank of England is seen diving into the pool when new leadership comes in July; there is artificial support around the globe. That can keep fear of capital market reversals and credit troubles down even as discussion of the Fed’s first steps of bowing out of the game gain traction. Funds that reflect investors’ interest in Treasuries and mortgage-backed securities (MBS) – assets that the central bank buys and savvy traders frontrun – have dropped sharply the past two weeks. This is a boon for the dollar while risk is slow to respond. However, risk appetite will not hold if QE3 has passed its peak. And, risk aversion would be another dollar booster.

Euro Readies for the Economic Bill with 1Q GDP Data on Deck
Finance Ministers in the Euro-area meet for the second day with the entire EU group discussing the health of the financial system and economy. Similar to Monday’s meeting with just the policy makers using the euro, the conversation was tailored to words of optimism and calls for action. Events like these are meant to encourage confidence, so the commentary should surprise no one. However, when we know what to expect; it is easier to spot the unusual developments. Notably, most of the key policy officials in the group made mention of a similar hot topic: the ‘bail in’. Raiding deposits as a means to stabilize a country’s banking system, this has become a popular term since the program was employed to save Cyprus from a very troubled fate. What is concerning though is that the reassurances were not that the unusual policy was a one-off, but rather that they wouldn’t look to tap accounts smaller than €100,000 in the future. Demand for uninsured accounts is market confidence territory…

It is easy to overlook the financial market’s strains now because we are not in an immediate crunch. With Greece and Cyprus receiving the most recent round in their respective bailouts Monday, Fitch upgrading the later to ‘B-‘ and Spain selling longer-term debt; conditions seem treacherously encouraging. However, we will invariably return to a flare up down the line. Perhaps the heat will be turned up through the upcoming session. On the docket, we have the first quarter GDP figures for the Eurozone, Greece, Germany and other key economies. The implementation of austerity has shown considerable progress for lowering excessive debt loads, but it has come at the expense of a regional recession. Can officials keep up the deficit fight or will the ECB have to support a growth agenda? The GDP figures will make decisions.

Australian Dollar: Down 7 Straight Days - Overextended or Building Momentum?
AUD/USD has dropped for seven consecutive trading days. That is the longest serial decline from this benchmark pair in years. It is naturally to assume that the Australian dollar is thereby significantly oversold – especially as global equities have charged higher. However, when we look at other Aussie-based pairs; the same over-extended impression is absent. Even AUDJPY (another risk-based, carry cross) is stuck in a tight holding pattern. On its own, the Australian dollar is weak – but not excessively so. This means that should risk appetite undermine ill-conceived carry trades on pairs like AUDJPY, AUDUSD will likely also feel the pain. Meanwhile, the Aussie Federal Budget is lamenting the high dollar.

Japanese Yen Facing 1Q GDP but Will it Turn the Currency’s Run?In the very public clash between the dollar and equities, it seems that the yen crosses side with the latter as a push towards risk appetite. However, the Bank of Japan’s chronic influence over the yen’s depreciation presents yet another convenient and misread distortion. In the absence of a committed risk-based move, the yen crosses will likely follow the relatively new stimulus program from Japan. Yet, it should concern those looking for passive gains that both AUD/JPY and NZD/JPY have fully stalled as the Nikkei 225 has extended its incredible run to 15,000. Thursday morning, Japan’s 1Q GDP figures are due for release. If this spurs risk aversion, these stalled crosses may be at risk.

British Pound Exposed to Volatility on Labor Data, European GDP
The Sterling is asleep at the wheel again. The currency is drifting while more active counterparts drive the pairings on other themes. However, that submissiveness may be shed in the upcoming London session. The Euro-area growth figures will have significant carry over effect on the UK as its primary trade exposure. Furthermore, the sterling’s own docket has key event risk: the April labor figures and BoE Quarterly Inflation Report. While both are good for short-term volatility, read them for influence over stimulus moves going forward.

Swiss Franc May Permanently Change its Safe Haven Status
While much of the European Union Finance Minister gathering headlines were dedicated to what would be done about a banking union, there was an interesting note that Swiss franc traders should keep an eye on. The group approved discussions with Swiss officials to discuss the surrender bank account information for those seeking tax havens after Austria and Luxembourg dropped opposition.