Dollar Slides After NFPs Move S&P 500 To Record High

There are many fundamental contradictions that are bound to fall apart for the markets – and the discrepancy between the S&P 500’s record move and safe haven USDollar’s stubborn hold to two-and-a-half year highs is one of the most endangered. This past week, the combination of relief in the Fed’s avoidance of setting a plan for managing QE and a positive showing from the labor data offered a perfect combination for investors looking for a reason to leverage up. The move above 1,600 for the benchmark equity index personified the exuberance, and the natural momentum of the upgrade ensured commitment. Yet, traditional market returns are still near record lows, participation is struggling and asset prices are rich. This is an issue only so long as investors believe it is – and collective beliefs require clear themes to change. If it dawns that stimulus will end, there would be no greater scythe to risk taking, but that has yet to transpire. In the meantime, the dollar tries to hang on.

Euro Fundamentals Worsening, Difficult to Veil Despite Risk Trends
The euro may have found a spat of relief from the European Central Bank’s restrained policy move this past week, but the situation is hardly bullish. Months ago, an argument could be made that the shared currency was attractive for its greater yield potential; but the stimulus efforts of the ECB have all but erased any hope of return on ‘safe’ assets in the region. Investors have taken to the more exceptional risks of periphery debt from Spanish to Greek sovereign bonds, which themselves have seen yields drop on demand. This is the epitome of desperation for yield. To top off weeks of discouraging fundamentals, the European Commission further downgraded the 2013 growth outlook for the region to a 0.4 percent contraction. The outlook is lifeless, but capital seeks any and all yield. But given all problems in the EZ, should the tide go out…

British Pound: Should Sterling Bulls Fear the BoE Rate Meet?
On a docket spotted with notable event risk, the sterling carries one of the more noteworthy releases: the Bank of England rate decision. Nothing is expected of the central bank, but therein lies the opportunity for a more significant surprise and currency reaction. The last time the policy group met, they surprised doves who had expected the Chancellor’s remit (allowances to deviate from its inflation mandate), the general malaise of the economy and actions of fellow policy groups would spur the MPC to action. Yet, they held the line. The pound has regained significant ground since then as bearish fears were unwound. Yet, we shouldn’t write off the possibility that fresh support will be offered and the sterling be hurt for it. Given the ECB moved the non-traditional and non-QE route, the BoE has a track to follow.

Australian Dollar May not Be Able to Handle Another RBA Cut
Despite enjoying the highest benchmark yield amongst the majors, the Australian dollar fell against most of its counterparts this week – and did so as equities hit records… Given the blind demand for return, it should be very concerning that this investment currency is showing such an uneven performance. Moving forward, this unusual bearing will be fully exposed by a heavy docket of event risk. Perfect fodder for volatility – and a significant sway over growth expectations when those matter again – we have employment, retail sale and trade data on deck. The real potential rests with the RBA rate decision though. There seems a near 50-50 chance of a move according to swaps, and that will spur concerns. With China showing signs of slowing and the Aussie dollar refusing to ease, can the central bank afford not to cut?

Japanese Yen: The Yield Chase Feed the Bubble, But for How Long?
Since September, USD/JPY has advanced as much as 30 percent. That is a long way to move in such a short time – particularly for the relatively calm FX market. What is even more remarkable about this impressive move is the fact that the market has put in for a meaningful correction to allow for profit taking and offer attractive levels for new players to enter the trade. The yen crosses have become the currency model to the extreme conditions in global markets. An all out appetite for return has dropped traders’ sense of risk – few would say the yen is not at least moderately oversold in the short-term – in the pursuit of carry. However, that carry is extremely thin. The yield differentials on pairs like EURJPY, AUDJPY, NZDJPY and others are record lows. This run doesn’t have to stop as long as the risk drive continues. Yet, should investors catch any whiff that an unwind is nigh; these over-extended pairs could perhaps be the most exposed.

Canadian Dollar Deals with a New BoC Governor, Jobs Data Ahead
The Canadian dollar managed to advance against all of its major counterparts this week – a considerable feat given the strength of risk trends (which could have favored higher yielding currencies) and the level of event risk. The strong showings in February GDP and the March trade balance no doubt played a role in that strength. Fundamentals will continue to carry a heavy sway over the currency in the week ahead. For traditional event risk, the April employment statistics due Friday are top billing. Yet, that doesn’t come into play until the end of the week. The risk of event risk can actually temper movement before its release and prove more burdensome than helpful to active traders. That said, the possible bearings of the newly announced BoC Governor-designate Stephen Poloz could capture rate watchers’ imaginations.