Talking Points:
- Dollar Consolidation Mirrors Yield Forecast
- Euro Pressure Builds as Another Greek Deadline Comes Into View
- British Pound Steady Despite Record Low Inflation Reading
Dollar Consolidation Mirrors Yield Forecast
Though the dollar’s larger trend is still bullish – both fundamentally and technically – the speculative ranks have clearly paused in driving the currency higher. The Dow Jones FXCM Dollar Index (ticker = USDollar) has consolidated for the past three weeks marking the longest break from the record, seven-month climb since the October slump. From a fundamental perspective, the equilibrium looks very much like the leveled out interest rate expectations. After retreating in January, we have seen Fed Fund and eurodollar futures rebound following the strong wage and labor figures nearly two weeks ago. Though the products still show the market is not fully pricing in the first hike until September or October (whereas economists and Primary Dealer consensus hold to the June or July time frame), an additional 50-55 basis points worth of hikes is priced through the end of the year. Reinforcing the front end time frame or leveraging the expected pace of hikes after the first move requires more tangible evidence – either through economic data or an increasingly unified FOMC view.
Yet, as encouraging as the US data flow has been (even after the recent tempering) and as relentless as the hawkish tone from the Fed majority remains, there isn’t enough to drive sentiment to the next plateau. In the meantime, the upcoming docket offers a range of event risk that can generate moderate friction in rate speculation with an off-chance of truly redefining the outlook. The Fed minutes from the January 28 meeting will be combed for meaningful changes to the views and voting habits of the central banks’ members. This is our best hold over until the March 18 FOMC meeting which will come equipped with updated forecasts and Chairwoman Yellen’s press conference. For data, housing starts, industrial production and capital flows (so called ‘TIC’ numbers) are important but won’t tap major fundamental veins. The factory inflation data (PPI) will carry a little more sway. A surprise to the upside will likely carry more market impact than a shortfall.
Euro Pressure Builds as Another Greek Deadline Comes Into View
Whether we look at the chart of EUR/USD, EUR/GBP or EUR/JPY; we see the same thing: building pressure behind consolidating ranges. As with the dollar, the euro’s price fits its fundamental lines well. We are heading into yet another deadline for Greece and its creditors to make meaningful progress on their negotiations or face further fanning fear of instability. Wednesday, the ECB will discuss what to do about Greek financial institutions’ access to the ELA liquidity program. After waiving exceptional policy that allowed the country’s lenders to use substandard collateral (Greek sovereign bonds that technically have a ‘Junk’ rating), the last source of funding was the ELA. This is only meant to be a temporary facility and there is a cap of €65 billion which may be quickly be swamped by deposit flight. Notably, back in 2013, the ECB cut Cyprus off from similar credit lines which in turn forced a deal between the government and euro-area leaders. A similar maneuver is unlikely to yield such straightforward results here and would be highly unlikely as it carries a very palpable risk of triggering systemic eurozone financial concerns. According to news reports claiming unconfirmed sources, Greece may request an extension to the country’s ‘loan agreement’ with stipulations. That would contradict what PM Tsipras has advocated to this point. Better to be less hopeful and more cautious.
British Pound Steady Despite Record Low Inflation Reading
That was not the reaction many were expecting. The UK’s headline consumer inflation (CPI) figure posted its slowest pace of growth in the modern measure’s 26-year history. At 0.3 percent year-over-year growth, it seems there’s plenty of reason to expect a permanent hold on hikes if not reason for future cuts. And yet, the pound was mixed on the day. Recalling BoE Governor Carney’s remarks last week, prices for fuel and food are dropping while core figures are stabilizing. Ahead, we have January jobs figures and the BoE minutes for more policy color.
Japanese Yen: BoJ Keeps to the QE Script but Problems Arising
As expected, the Bank of Japan (BoJ) announced no changes to its open-ended QQE program. Further, their comments suggested they would continue with the policy effort until their inflation goals are met. Yet, cracks are forming in the stimulus façade. Last week, it was reported some BoJ members are voicing concern of the detriments of an excessively low Yen.And, as CPI rises, real wage growth is collapsing…
US Oil Closes in on Meaningful Reversal, But Supplies Not Aiding Ascent
The benchmark US WTI oil futures contract tempted another move on $55 this past session though it ultimately held near the top of the range from the past two weeks. A reversal can happen on a supply-demand adjustment, but no major output changes are expected, so that spark may await Thursday’s DoE numbers. We should also watch a speculative spark. Volume and open interest are rising in futures. Is it trend-worthy?
Emerging Market Currencies Mixed, Capital Markets Slow to Follow US Equities
It was a meaningful disparity in performance. On the one hand, we had US equity indexes setting record highs while the MSCI Emerging Market ETF floundered with a 0.2 percent drop on the day. The implications of monetary policy changes and capital flight on developed world issues is too prevalent. For big FX moves, the Russian ruble is already up 1.5 percent this morning as Ukraine tensions refuse to temper.
Gold Drops Alongside Dollar
Historically, gold and the dollar maintain a strong negative correlation. Over the past five trading days (one week), that relationship has flipped positive (0.50). That is remarkable given that the dollar slipped on the day while the precious metal dropped 1.8 percent. With another financial spark ahead between Greece and the ECB and lingering dollar, we will see if the metal can fall back on its bygone drivers.