Dollar Recovers Lost Ground, Sentiment May Falter Without Catalyst

Though the Dow Jones FXCM Dollar Index didn’t make much progress through Wednesday’s session, its intraday recovery was remarkable. The greenback has shaken the selling pressure that has been in place since the year began, but a meaningful bid has yet to fill the void. Like most other benchmarks for risk appetite (whether safe haven or yield provider), the greenback is leveling off. Yet, risk watchers can sense the pressure building each day. Despite exceptionally light volume and low implied (expected) volatility readings, the fallout from catalyzing the ever-present Euro Zone financial crisis leverages a clear safe haven premium to the greenback. The question – as it has always been – is timing.

Euro: Stringing out the Euro Zone’s Crisis is Intensifying It

Just a few months ago, a bid to buy another week before having to make an important decision in the Euro Zone’s ongoing financial crisis would have cleared the way for the euro to rally. How things have changed. The postponed EU ministers meeting (previously planned for last week and then for this past session) on the second Greek bailout package is hanging over the market like a fog – obstructing the future for an already very troubled region. Recapping the conference call that replaced the meeting, the EU’s Juncker commented that he was confident that everything will be resolved by Monday – the new deadline. What was absent this time around? According to the Eurogroup Chairman, stronger surveillance and comment by Greece. On the other side of the fence, Greek Finance Minister Venizelos said the Troika (EU, ECB, IMF) was playing with fire and that new terms are continuously tacked on when a solution seems near. In the meantime, the March 20th, €14.5 billion payment is approaching, and the strain is more apparent (Moody’s has warned that 116 EU banks have been put on watch). Patience is wearing thin…

British Pound Reserve Reaction to Inflation Outlook, Jobs to Follow Risk

There was plenty of potential market-movement in the collective event risk for the sterling over the past session, but expectations worked to ensure the reaction was muted. From the labor report, the 6,900-claim increase strayed far from the consensus forecast and the 8.4 percent unemployment rate was ultimately unchanged. So, from a broader fundamental perspective, there is little here to change the slow trend towards a modest recession under the burden of recession. In contrast to the short-term volatility potential of the employment data, the BoE Inflation report could tap into the lasting shift of the pound towards a wholesale stimulus currency (much like the dollar). Yet, leaving the door open more bond purchases and fears of the Euro Zone spread were not new. And so, the focus shifts back to the euro correlation and dominant risk trends.

Australian Dollar Rally Post-Employment Quickly Falls Apart

Though the broader FX market is showing evidence of substantial volatility, the Australian dollar nevertheless stood out this past trading session thanks to a leveraged reaction to meaningful scheduled event risk on the Aussie docket. This morning’s stop headline was the much-sharper-than-expected jump in the January employment level. A 46,300 net increase in payrolls last month was more than four times the consensus and reason enough to fortify sentiment in normal conditions. Yet, we are not dealing with ‘normal’ conditions. Uncertainty over the stability of the global economy and market presents a proverbial anchor on anything that is considered to be tied to investor sentiment. Therefore, when the Australian dollar took higher after the improved economic data, we were seeing a move on many risk-sensitive pairs that was at high risk of returning to a mean defined by underlying sentiment trends. Not surprisingly, AUD/USD’s post-data rally was quickly and completely retraced.

New Zealand Dollar Fails to Gain Traction on Manufacturing Data

The New Zealand dollar is lower across the board – with the exception of EUR/NZD – as risk aversion drives the carry currency lower. It is important, in times like these, to remember the kiwi dollar’s roll in the global FX market. A currency that backs such a small economy seems to have no place in the upper echelons of the most liquid; but the unit enjoys a special status because of its consistently high yield and otherwise stable sovereign credit rating. What does this combination present to global investors? A perfect carry currency. However, that role means that a slide in risk trends leaves the kiwi little chance of holding its own. That is the situation we find NZD/USD in currently. As US equity futures track lower in the Asian session, so too does the carry-prone major slide. Where does that leave the factory PMI reading? On newspaper headlines.

Japanese Yen: Risk Aversion Undermines the Azumi’s Yen Tumble

Japanese Minister of Finance Azumi and Bank of Japan Governor Azumi were no doubt feeling a little more optimistic this week as they watched USDJPY climb to highs they hadn’t seen since the end of October (the previous move notably one that was artificially strong-armed by unprecedented manipulation). Yet, if the policy makers feel they can rest on their haunches now, they will most likely find their nerves once again strained. Though USD/JPY (the focus of intervention for Japanese officials) has yet to retreat, we have seen the more risk sensitive, carry pairs (EUR/JPY, GBP/JPY, NZD/JPY, etc) pitch into notable reversals. The move shouldn’t surprise the fundamentally-minded trader. It is the natural path of a market that is tipping into a broader trend of risk aversion. What we should assess is whether Japanese officials truly appreciate this connection. If they do, they may see the risk that the yen could quickly rally back to record highs. Would they preempt such a shift?