Talking Points:
- Dollar Holds Fast as Fed Officials Feed Rate Hike Speculation
- Euro Heading into the Lion’s Den as Eurozone-Greece Talks Scheduled
- British Pound Feels EU Connections, Awaits BoE Quarterly Report
Dollar Holds Fast as Fed Officials Feed Rate Hike Speculation
The Dollar is holding its ground rather than progressing. While Fed rhetoric continues to actively build interest in rate speculation, the forecast for a ‘mid-2015’ hike may be a saturated theme. In the meantime, there is untapped potential in the troubled situations for the Greenback’s major counterparts. As the Forex market’s primary ‘alternative’ (reserve) currency, downgraded yield forecasts for one region or financial trouble for another will find a majority of capital flowing to the US financial system. At the top of the Dollar trader’s list of fundamental cues to watch moving forward is the situation in the Eurozone (more on this below). While the region’s leaders and central bank may have better prepared it against contagion risk from flare ups like a Greece standoff, it is unlikely that they can avoid capital flight.
Adding to the Dollar’s counterparty strength; the BoJ is maintaining its easing path, swaps are pricing in an RBA and RBNZ rate cuts (37 and 13 bps over 12 months, and the BoE – the Fed’s closest peer – is on pause ahead of its quarterly report due Thursday. For the Fed’s own bearing, the 44 bps worth of hikes being priced in through next February offers leverage in its contrast. This past session, Richmond Fed President Lacker (a voter) repeated a June time frame for the first rate hike was an “attractive option”. Meanwhile, Kansas City Fed President George took a different tack when she remarked that hiking rates earlier rather than later can help head off an asset bubble. From the market’s perspective, Fed Funds futures are not pricing in the first full hike until the October meeting while a recent Reuters poll of Primary Dealer found 10 of 19 believed the first hike would come in June (previously it was 13) and the median expected a 0.75 percent rate at the end of the year. There is room to build or collapse the rate view, but a meaningful shift in ‘risk’ trends remains top potential.
Euro Heading into the Lion’s Den as Eurozone-Greece Talks Scheduled
The sound bites about the Eurozone-Greece debt standoff crossed the wires at lightning speed this past session. And little of it sounded encouraging. Some media reports quoting ‘insiders’ in the two camps suggest both sides are more open to compromise than the leaders’ commentary lets on. However, if it is between Prime Minister Tsipras’ own public statements and an unnamed source’s reassurances, it is more prudent to take the policymaker’s threats and beliefs at face value. This past session, Tsipras put his hardline negotiation terms up to a confidence vote and won strong support. Among the terms, he said he would not ask for a bailout extension, will seek a bridge loan (with no new austerity measures attached) to negotiate through June, and they would not accept Troika auditing. Those would be difficult terms for Eurozone officials to swallow. For the more conservative, they are likely fully unacceptable. German Finance Minister Schaeuble for example said there would be no more time (refuting speculation of the six-month extension), that Greece can’t “negotiate something new” and that it would be “over” if the country doesn’t ask for an extension. Those are diametrically opposing stances. While there is always room for compromise and for yielding concessions, it is worth considering what happens if Greece eventually leaves the Eurozone.
British Pound Feels EU Connections, Awaits BoE Quarterly Report
High profile event risk can prove exceptionally market moving or lack impetus altogether depending on the outcome and the market’s expectations. However, there is a far more consistent market influence when it comes to a fundamental storm: a drop in activity and withdrawal of exposure in the lead up to the event’s dawning. That is what we should consider for Pound pairs in the lead up to Thursday’s Bank of England Quarterly Inflation report – a key insight into speculation surrounding the central bank’s plans for that deferred rate hike. In the meantime, watch for spillover effects from the Eurozone’s more active issues as the EU connection can make for easier transmission.
Canadian Dollar Worst Performer as BoC Feeds Speculation of Further Cuts
While the Fed decision will stand as top event risk for the broader FX market given its outlier status, the greatest market-movement potential for a specific currency likely rests with the RBNZ decision. Not only is the bank’s head Graeme Wheeler prone to blunt statements, but the market has deviated aggressively from his most recent lean (modestly hawkish) due this week’s CPI. If he maintains course, Kiwi could snap back.
Australian Dollar: A 41% Probability of an April Hike Heading into Jobs Data
The RBA cut interest rates at its last meeting, and concerns about the economy as well as the ‘fundamentally expensive’ currency seems to have the market believing there is a good probability of a back-to-back easing at the next meeting on March 3. Swaps arepricing in a 41 percent probability of another 25 bp cut. Given the sensitivity of the market to rates, Thursday’s jobs data can leverage a big shift here.
Emerging Market Currencies Drop Lead by Brazil Real’s Tumble to Decade Low
Both Emerging Market equity and sovereign bond benchmarks have eased the past week, but they are far from freefall. In a risk-adverse world, the higher risk assets in these regions should theoretically be leaders in deleveraging. So is this effective policy, complacency or hope? From the FX ranks, the Ruble is still meandering near record lows, while the Brazilian Real tumbled 2.2 percent to a 10-year low.
Gold Still Drawing Speculative Appetite, Struggling for Systemic Demand
Looking to ETF holdings and the CFTC’s Commitment of Traders report, we find there significant demand building in certain areas for gold. However these are avenues that could reasonably labeled ‘speculative’. Where is the systemic demand for inflation and ‘deteriorating fiat’ hedges? It is still not showing in the face of Greece and new stimulus programs. If complacency is broken, will this change?