Dollar Regains Strength Vs. Euro, Yen As Fundamentals Approach

A risk appetite swell seems to have saved the safe haven dollar from making a significant, bearish shift. While that may seem initially counterintuitive to our normal fundamental expectations, it makes a little more sense when we look at the greenback’s breakdown. From basic risk trends, we find the solid S&P 500 rebound didn’t materially advance its bull trend. Furthermore, the Risk-Reward Index (a fundamental measure of return versus volatility) was equally uncommitted to a strong move. As such, where the AUD/USD was showing gains; the speculative appetite behind carry wasn’t robust enough to leverage pairs like EUR/USD and GBP/USD higher. The positive correlation between the Dow Jones FXCM Dollar Index (USDollar) and equities is one borne from a lack – rather than abundance – of risk commitment.

Japanese Yen Rally Fails to Evolve Into Trend as Uncertainty Reigns
The technically-impressive rally from the Japanese yen (drop in yen crosses) to start this week ran out of energy quickly, as expected. Forcing a technical break on tight price congestion – like USDJPY’s below 94.00 or EURJPY below 120 – is a high probability outcome given the market conditions. With a market that is broadly active and with heavy yen-based event risk ahead tempering market depth, it becomes easier to break technical boundaries. Follow through, on the other hand, requires more than a lack of participation. Notably absent in the yen’s move Monday was a substantive fundamental driver. That deficiency has caught up the currency and disgruntled more than a few breakout traders. To keep the yen moving through the immediate future, we need one of two factors. More difficult to muster would be a sharp reduction in stimulus expectations heading into the Bank of Japan’s (BoJ) policy meeting on Thursday. Yet, given Governor Kuroda’s verbal commitments and suggestions of scrapping a stimulus cap rule; that is unlikely to catch. The other option is for a strong risk aversion move…

British Pound Breaks Down Across the Board
Without doubt, the pound was the weakest currency amongst the majors Tuesday. A 125-pip drop for GBP/USD back from key resistance at 1.5250 offered a sound benchmark for a universal drop on the day. However, there were other, more remarkable moves – such as the GBP/NZD’s dip to record lows. What instigated this abrupt drop? The fundamental docket offered a few economic updates, the most remarkable of which was the March manufacturing activity report which fell short of the expected series improvement (the 48.3 read still show sector decline). Aside from this, rate speculation was steady. Without a clear and material drive, this bear trend will struggle to develop.

Euro Weak as Fundamental Deteriorate, Kranjec Skeptical on Slovenia
Amid a disappointing round of fundamental data, unflattering headlines from Cyprus, Spain’s admission of further fiscal trouble and fear-mongering for Slovenia, there was little chance that EUR/USD would make a decisive move above 1.2875. Nethereless, the market-wide Euro stumble wasn’t of the magnitude that suggests a new fundamental trend has been established. Looking over the developments on the day, news that the unemployment rate in the Eurozone hit a fresh record high of 12 percent should surprise no one. The Italian budget deficit through March hitting its fastest stride in at least a decade is concerning though. Far more interesting was ECB member Kranjec’s unflattering economic outlook for Slovenia (-1.9 percent GDP in 2013) and blunt call for government action contradicts reassurance that the country will not pose a systemic threat. Meanwhile, Spain’s admittance that it missed its deficit target by a wide margin slowly revives fear of region-wide issues.

Australian Dollar: Look to AUD/NZD for Assessment of RBA Decision
There was material fundamental potential in the Reserve Bank of Australia’s (RBA) rate decision this past session, but the central bank wasn’t looking to jump start speculative ambitions. Looking beyond the announcement that the benchmark rate would be held at 3.00 percent (fully expected), the masses were combing through the comments that accompanied the policy decision to assess the probability of further easing later down the line. Retained was key commentary that suggested inflation offered the scope for possible further rate cuts. This inherently avoids a shift to ‘neutral’. Some believe that the policy outcome was somehow hawkish and thereby bullish. However, when we look at AUD/NZD – which pits one investment currency against another – we see there is little weight to this claim. AUDUSD’s move was superficial risk trends.

New Zealand Approaches 0.8500 but Bond Rally Cools
The New Zealand dollar is an ‘investment currency’, and thereby global market participants migrate to it when they are seeking out higher yield. Risk appetite Tuesday was tangible, but conviction is still lacking. However, where there is questionable demand for the standard investment assets, there has been a more committed demand for the kiwi and its debt. The capital inflow is evident in the NZD/USD’s revived move towards 0.8500 as well as AUD/NZD’s extended 265 pip drop (high yield versus high yield). However, that individual strength may soon run out of steam. Looking at the New Zealand benchmark 10-year government bond, an aggressive 6.3 percent drop in yields come on a remarkable influx of demand. Yet, Tuesday, that momentum all but collapsed. Once again, the kiwi will fall back on traditional risk trends to find its bearings.