Euro May Not Hold Back The Tides on ECB Cut, Fresh Cyprus Trouble

The dollar seems to slip back into its customary position on the risk spectrum this past week with a retreat that mirrored the S&P 500’s persistence. However, risk trends and dollar bearings may be shaken in the near future as trader prepare for the Fed rate decision and April NFPs. Regardless of what delivers the push, a catalyst for the greenback is desperately needed – particularly if the ambition is to carry the benchmark currency higher. From the Dow Jones FXCM Dollar Index (USDollar), we can see the risk in the flagging bullish momentum. Having failed to overtake the mid-point of the index’s past decade trading range – fixed just below 16,000 – there is a clear risk for profit taking and reversal. The same assessment can be made when looking at EURUSD as it struggles at 1.3000 and USDJPY after the tentative change of trend after failing to overtake 100. When we talk about fundamental divergence, there is a credible argument to be made that risk trends are ‘overbought’ relative to the historically low yields and questionable confidence established in central bank stimulus. Yet, these obstinate inconsistencies have proven durable. The dollar’s ability to climb alongside ill-founded risk appetite though…

An effort to close the gap between dollar and sentiment trends may be made through the upcoming event risk. The Federal Reserve Open Market Committee (FOMC) rate decision is a key opportunity to stir risk aversion – which is dollar bullish – or inversely deflate the greenback’s strength. The market and media has become deeply divided over assumptions that the central bank will ease the pace of QE purchases well before year end or that it will actually increase the effort. If the balance holds towards a drop in asset purchases before 2013 closes, it will dampen moral hazard and open other regions to play catch up in the stimulus race. The other well-known catalyst to watch if the April labor report. Habit encourages traders to respond to the outcome relative to the consensus, but the real reaction is one layer deeper as we know the jobless rate is a factor in the Fed’s stimulus plans.

Euro May not Hold Back the Tides on ECB Cut, Fresh Cyprus Trouble
EURUSD managed to close out the week above 1.3000 – a considerable feat considering the trouble that the euro faces. This past week, the trouble was read in headlines and on the economic docket. There were many various nodes for bears to draw a well of concern, but perhaps the most surprisingly minimized development was Spain’s trouble. After the Bank of Spain offered a 1Q GDP assessment for a 0.5 percent contraction, the Government both downgraded growth forecasts (2013 will contract 1.3 percent instead of 0.5 percent) and lifted its deficit projections (from 4.5 to 6.3 percent this year). This is a serious threat that went unrewarded by reaction because of the high tolerance for pain in the Euro-area for ‘risks’ and a distraction in debate of an ECB policy move. The central bank’s meeting this week is top event risk. Expectations of a cut have soared amongst economists, but we aren’t seeing the same conviction in euro price action or yields. This discrepancy may ensure volatility regardless of the ultimate outcome. Before we come to the Thursday central bank move, though, we must also keep an eye on Cyprus and Greece. Both have critical votes for more austerity they must push through in order to keep the stimulus flowing.

Japanese Yen Starts to Gain after BoJ Hold – Just the Beginning?
As expected, the Bank of Japan held its hand after deliberating monetary policy. Given the central bank adopted an incredible objective to double the money supply within two years via monthly stimulus injections earlier this very month, there was little chance of an immediate escalation. Nevertheless, the confirmation of this shift away from the constant threat of escalation can act as a cold shot of reality for the speculative market. While there will be a long-period of easing – a natural currency deflator – a considerable amount of easing has already been priced in through the verbal threats. Will the yen slowly slide as capital seeps in or will speculators look to cut as volatility returns?

British Pound Extends its Recovery as Market Realizes Stimulus Not in Cards
The sterling finished this past week higher against all of its major counterparts. That is an impressive record considering the market-wide advance from the Japanese yen. We had a catalyst through this period to rally the bulls (the better than expected outcome from 1Q GDP), but the real lifting was from the fact that this united the market behind a deeper current – that the sterling has room to recover after suffering so-far unsubstantiated fears of a Bank of England stimulus upgrade. The pound drop through the first quarter against its stimulus-bound counterparts mirrors that belief clearly. That same burden will now offer a source of relief movement. It will move faster with catalysts though.

Canadian Dollar Taps GDP and Trade Data as Carney Set to Speak Again
USDCAD made a critical turn lower this past week having failed to overtake 1.3000 and thereby significantly alter years of congestion. The ‘loonie’ has gained traction against the euro and yen, which suggests a more broadly-based strength. This native potency is due in no small part to the perceived stability of the currency. A stable (and notably higher than the US) yield, stable economy, and stable market. Yet, what happens when Carney is out and given that the IMF projects Canada’s growth will trail most of its international peers (excluding Europe)?

Swiss Franc Updates on its Market Exposure
Despite the fact that EURCHF has lifted off of the central bank-imposed 1.2000 floor some months ago, the spot rate has not moved far and the Swiss National Bank (SNB) has not attempted to sabotage itself by selling its reserves. There is still distinct risk in a Euro-area crisis and Switzerland is a clear haven. We will see what the SNB is capable of for further support with their first quarter results due Tuesday.