Dollar Slides a Fourth Day as Risk Appetite Persists, Euro Rallies

Dollar Slides a Fourth Day as Risk Appetite Persists, Euro Rallies

On the week, the dollar finds itself significantly lower against all of its major counterparts with the exception of the Japanese yen. This is a move that fits the picture that the broader capital market is painting for us. Among the signs, we find the S&P 500 advancing to fresh five-month highs, volatility indexes are testing lows not seen since July and the euro is charging higher across the board. When the masses are pining for liquidity and safety of funds at the cost of a negative real rate of return, the greenback will shine. And, conversely, when this sentiment extreme isn’t pressuring the masses; funds will seek greater diversity. That said, a move away from an extremophile currency does not necessarily mean that risk appetite will naturally climb to new heights.

Everything we have seen from the capital and FX markets suggests that what we have seen to this point is a pull back or retracement. As the jitters of panic in the spread of a global crisis pass, there is room to unwind positions that look to speculation on or insure against impending catastrophe. Traders must ask: how much premium is there to unwind, and will fear return before this correction is naturally completed?

Euro Marks a Critical Technical Break Higher as Relief Pours In

After a round of Spanish and French bond auctions through Thursday’s session, we have officially closed out the last of this week’s important bond auctions. What started as a period that was destined for disaster after last Friday’s round of sovereign ratings downgrades (including France, Italy, Spain and Portugal), we are ending with a sigh of relief. Objectively, the rates that the various governments pulled from the market are not sustainable for financing deficits and spending over the medium to long-term, but they do ease the threat of imminent doom (a complete collapse of credit and funding). And, risk of uncontrollable financial crisis was what drove the shared currency so low, so quickly. Therefore, it is only reasonable that the immediate pressure relief should lead to near-term recovery. That said, over-estimating the pace (and possibly depth) of the crisis doesn’t imply a recovery with higher yields and non-existent risk.

With the bullish tide that accompanies this corrective rally, we can see optimism stain bond auctions outcomes and expectations for various open-ended problems. A notable example is the negotiations between banks and Greece for a viable agreement to help Greece to a surplus. FT reported a deal was close while the New York Time says Hedge Funds may sue. I refer to Fitch that says: regardless, it would be a default.

British Pound Slow to Follow Euro Higher, Looking Ahead to GDP

The FTSE 100 closed at a five-month high through Thursday’s close in London, but this is yet another example of asset pricing running astray of genuine fundamental potential. Typically, the stock market will follow growth potential through an ‘investment, wage, spending, production, revenue increase’ cycle. Yet, we know that expansion is exactly the opposite of what’s in store for the United Kingdom through the immediate future. In fact, the Bank of England Governor, Chancellor of the Exchequer, World Bank and industry groups have all warned that the country may dip into period of negative growth – if not technical recession. Suggestion an economic slump and all it would entail has already been priced in is preposterous as it entails an indefinite period of little-to-no dividend income alongside rising capital loss risk. This raises a very real red flag for next week’s 4Q GDP reading. Following the euro higher could set the sterling up for a big fall given the correct fundamental winds.

Australian Dollar Employment Hit Evaporates, Rate Outlook Still There

A perfect example of how impulsive and ultimately erratic the initial impact of scheduled event risk can be: the Australian employment data from Thursday morning was good for a virtually-immediate 50-pip swing from the single currency. Yet, through the rest of the trading day, the Aussie would recover all its lost ground and simply chop along until the close. There are initial impacts and long-term impacts from event risk. Furthermore, there are dominant fundamental themes that require more time to fully untangle price in. And, with this recently strained comm bloc player, the concern in risk appetite trends versus expectations of another 100 bps sliced off the benchmark rate by this time next year.

New Zealand Dollar Holds Onto Losses, But RBNZ Still Seen Steady

No doubt the market had priced in the significant relief in inflation pressures that was already projected for the fourth quarter CPI indicator. And yet, the actual 1.8 percent annualized reading (below the central bank’s 2.0 to 3.0 percent band) reinforces the risk that even Alan Bollard may be forced to shift gears and offer the economy some accommodation. That isn’t the way the market sees it though. In fact, despite the significant slide in the kiwi itself; the 12-month rate forecast is still virtually unmoved. As for next week’s meeting, here is a 4 percent chance of a cut.

Japanese Yen Losses Ground to Dollar Even as JGB Rates Swell

The Japanese was one of the hardest hit currencies over the past 24 hours. This is no doubt in large part due to the general shift out of low-yield bearing safe havens and back into the those assets with capital appreciation and rate income potential. However, it is interesting to note that the funding currency fell against its fellow safe haven in the dollar and gave very little ground against the commodity bloc. In fact, the US dollar gained more ground against the yen than the Australian and New Zealand alternatives would. We could chalk this up to the data run Thursday morning, but that doesn’t include the underperforming CADJPY. The reality is that this is another sign of question risk appetite trends.