Dollar: Will Market Shift Towards Fed Bullard’s View?
The market was leaning heavily on the bearish rudder for the US Dollar to start the new trading week, but a bounce in shorter duration Treasury yields – better measures for Fed rate benchmarking – saved the currency from a definitive bear trend. Yet, in spite of the last-minute save, the currency is still struggling to regain traction on its effort to mount a lasting recovery begun earlier in the month. So far in May, the dollar is up against only three of its major counterparts (euro, franc, pound) and lower against the balance. Neither risk trends nor monetary policy forecasts have evolved in favor of the greenback. Then again, neither have their unfavorable bearings sent the currency reeling. Skepticism and hesitation seems to be balanced against both the bullish and bearish paths. That puts the onus for active trades on volatility.
The phenomenon of the market’s current volatility drought continues to sink to ever more extraordinary levels. While much of the attention is still paid to the low levels of the stock-based VIX bubbling around 12 percent – a natural floor exists around 10-12 vols historically – the FX market readings are arguably more extreme. The medium-term (1-month) expected FX volatility reading currently stands at 6 percent. The absolute low was set 7 years ago at 5.48 percent. On an even shorter scale, the one-week reading hit a record low of 5.0 percent. A natural rebalancing of this extreme would see a rebound in volatility which has a directional bias towards risk aversion. In a sharp ‘risk off’ move, the dollar would theoretically regain its distanced safe haven appeal. While we wait for sentiment to find level again, the dollar seems comfortable with its relationship with Treasury yields. Last Friday, St. Louis Fed President James Bullard remarked that under his optimistic view, a rate hike could come at the end of Q1 2015. If the market is persuaded towards his view, there is plenty of premium to climb.
British Pound: On Volatility Watch Again with CPI
Honors of top scheduled event risk this week goes to the British pound which faces the April round of inflation data in the upcoming London session – due at 8:30 GMT to be precise. The price pressure assessment will be a broad one with measures for consumer, factory, retail and housing statistics. The cumulative reading on inflation is a critical component to the Bank of England’s monetary policy map as they derive their timeframe for the first rate hike out of prominent headwind. However, to simplify the speculative procedure, traders will focus on the CPI reading for their assessment of timing the hawkish turn. The annual reading is expected to tick up to 1.7 percent (from 1.6) while the core moves up to 1.8 percent (from 1.6). If met, that would slowly feed already aggressive expectations. But, there is far more impact on a shortfall here.
Euro: Already Adjusted for ECB Stimulus?
According to their monthly survey, Bloomberg reports that 90 percent of economists expect the ECB to introduce fresh monetary accommodation when they meet again on June 5. Debate is arising over what form of easing will this move take shape as – rate cut, targeted lending, a halt to sterilized bond purchases, open QE. That will certainly be a consideration for how significant the currency impact will be as much as the economic. However, before we even weigh in on this argument, we need to ask whether EUR/USD at 1.3700 already fully reflects an ECB move. Given the slow turn in liquidity, short-term market rates and sovereign bond yields; it is unlikely it does.
Australian Dollar: Exposure to S&P AAA Credit Warning Serious
Rating agency Standard & Poor’s issued a warning from one of its lead analysts Monday suggesting that Australia is at risk of losing its coveted AAA-credit rating if the country does not implement budget cuts moving forward. While the warning amounts to a technical one-in-three chance of a downgrade, the threat is substantial as it taps into the fundamental position of the currency in the spectrum of ‘the majors’. Though the 12th largest economy in the world, the Aussie's carry appeal is a critical factor in its value. A lower rating would seriously undermine that.
Chinese Yuan Eases a Third Day, Officials Indicate Further Opening Markets
The offshore Chinese Renminbi fell a third day versus the US dollar through Monday – though the move lacks for momentum. As the USD/CNY trades between 6.2450 and 6.2250, capital markets opened the week with a 1.1 percent drop from the Shanghai Composite. In the news, a report that 10 provinces and cities will soon be able to raise municipal debt reflects financial liberalization…and a channel for risk.
Emerging Market: Ruble Rally Less Impressive as Thailand Comes Under Martial Law
It seems that when one door closes to crisis amongst the Emerging Markets, another opens. In this case, the Ukraine-Russia-eurozone tensions remain despite renewed vows that Russian troops would be pulled back from the boarder. Yet, adding a new concern to this risk-sensitive classification, breaking news that Thailand had been put under martial law generated concern in the financial web. The US Dollar-Thai Baht exchange rate jumped 0.5 percent after the news. It is reported that the Thai central bank sold dollars to stabilize the exchange rate.
Gold Interest Fading as Breakout Risks Grows
Are investors content or concerned? Gold's first trading day this week ended virtually unchanged with a $0.39 slip to $1,293. A tempered Fed outlook and discussion of a certain ECB stimulus upgrade doesn’t seem to be offering the alternative store of wealth any help. Furthermore, speculative appetites seem to be drying up alongside volatility measures and other capital market assets. Volume on the day was tepid in the derivatives market. Meanwhile, ETF exposure is hovering at multi-year lows, futures open interest is dropping and last week’s COT figures showed the first drop in net long speculative interest in four weeks. A break – any break – is more important now than direction.