Dollar Mounts Big Intraday Rally, Market Sensitive to Risk Hits New Level
We have finally seen a trading day that has offered something in the way of clear direction and perhaps even a little conviction. However, follow through is just as sidelined as it has been on any of the preceding trading days this week. Still standing in the way of a market-wide shift in risk trends - and thereby the US dollar - we need better clarity on the health of economic activity and financial market functioning moving forward. Luckily for us (or not, depending on how one is positioned); we will find some level of clarification on the global market’s biggest threat to stability going forward heading into the end of the week. The ECB rate decision from this past session represented one half of policy officials’ response to the world’s most ominous financial risk. The biggest drop from the EUR/USD (0.5 percent) and benchmark S&P 500 Index (-2.1 percent) in two weeks tells us the consensus was one of disappointment. That shifts our attention to the next (and possibly final) effort to stem the spread of financial contagion with the EU Summit. The world’s most liquid, reserve currency awaits the verdict.
It is easy to simply look at the performance of EUR/USD and chalk up the greenback’s health to this pair alone. However, as we head into greater uncertainty between stimulus programs, economic sputtering and the ill-effects of fading market confidence on capital flow; it is important to reflect on the dollar for its own strengths and weaknesses. For flaws, there is a questionable growth outlook, a ballooning fiscal deficit and excessive stimulus is watering down the currency’s inherent value. Yet, despite all of these issues; the market is willing to overlook them and bid the dollar higher if its virtues are amplified. Given the financial rollercoaster over the past three years; it isn’t difficult to see that absolute risk aversion (where return is sacrificed for safety of funds) is the currency’s ideal scenario. Will we see this tomorrow? That depends on the EU.
Euro Traders Disappointed by ECB Efforts, Will the EU Compensate?
The bulk of the headlines this week related to the future of the Euro Zone and the euro have revolved around speculation as to which initiatives the European Union could push forward at the end of the week. However, with four comprehensive plans to rescue the region having already fallen apart; it is arguable that the European Central Bank has the greater fire power to offer a viable and lasting solution. The group certainly delivered meaningful support in this time around; but the changes nevertheless seem to have come up short of fully reviving confidence in the Euro-area’s markets and economy. President Draghi and his colleagues announced a 25 basis point rate cut to the benchmark lending rate, a new three-year unlimited liquidity program, a cut in the reserve ratio to 1 percent and easing in the collateral criteria for banks to draw loans. These are significant efforts; but optimists were expecting a larger rate cut and more importantly an expanded bond purchasing program. In fact, the group lacked a major for realized quarter percent cut and Draghi said he did not support an increase to the 207 billion euro bond holdings.
The ECB’s reticence to help the Euro Zone pushes the ball back into the EU officials’ court with the central bank head calling for greater fiscal consolidation and potentially treaty changes that would bestow more power to the European authority to enact sweeping policy akin to what the Fed is capable of. As for the Summit, the possibilities for a true solution to the long-term issues are slim. Increased funding for stimulus programs or guarantees would put the region in greater jeopardy of the critical downgrades that Standard & Poor’s has threatened. Common fiscal rules certainly helps prevent future issues; but it does not put an end to the current problems. The true help rests with the ECB; but that is at the very least later down the line. In the meantime, don’t write off a short-term, confused relief rally. Just don’t expect follow through.
British Pound Ignores BoE Hold, Falls in Sympathy to Euro Tumble
As expected, the Bank of England rate decision passed without event. With the European Union in disorder, Governor King (who has vociferously warned about the possible spread of financial crisis) would find good reason to sit back and await guidance from the ECB. It is important to remember that the UK is a member of the EU. The country will shoot down any EU-wide fixes that involve a financial tax.
Canadian Dollar Tumbles Alongside Risk, BoC’s Financial Warnings
The Canadian dollar was under pressure Thursday and the selling effort carried forward to into the early Friday session. Risk trends are the primary catalyst here as the investment currency (mainly through its commodity ties and yield premium to the US). Friday carries a lot of risk; but a clear sentiment bearing may elude us until after the market’s close. In the meantime, trade figures will take a back seat.
Swiss Franc Playing Safe Haven but EU Connections Too Concerning
The Swiss franc has played safe haven against nearly every one of its major counterparts – except for the dollar. The ECB efforts promise to fill out liquidity through the immediate future; but the underlying issues with investor confidence remain unresolved. If the EU fails to deliver a meaningful solution to building fears, it will be important to gauge the franc’s position as a safe haven against its EU influence.
Japanese Yen Volatility Against USD a Sign of BoJ Intervention?
The Japanese yen posted a remarkable rally against the US dollar this past session that was quickly reversed. It isn’t a stretch nowadays to entertain the thought that this could be an intervention move; but if we look across the more risk-sensitive dollar based majors, we see the same thing. This is an interesting move that suggests that organized risk aversion still seems to favor the yen over the dollar (carry unwind vs liquidity).
We have finally seen a trading day that has offered something in the way of clear direction and perhaps even a little conviction. However, follow through is just as sidelined as it has been on any of the preceding trading days this week. Still standing in the way of a market-wide shift in risk trends - and thereby the US dollar - we need better clarity on the health of economic activity and financial market functioning moving forward. Luckily for us (or not, depending on how one is positioned); we will find some level of clarification on the global market’s biggest threat to stability going forward heading into the end of the week. The ECB rate decision from this past session represented one half of policy officials’ response to the world’s most ominous financial risk. The biggest drop from the EUR/USD (0.5 percent) and benchmark S&P 500 Index (-2.1 percent) in two weeks tells us the consensus was one of disappointment. That shifts our attention to the next (and possibly final) effort to stem the spread of financial contagion with the EU Summit. The world’s most liquid, reserve currency awaits the verdict.
It is easy to simply look at the performance of EUR/USD and chalk up the greenback’s health to this pair alone. However, as we head into greater uncertainty between stimulus programs, economic sputtering and the ill-effects of fading market confidence on capital flow; it is important to reflect on the dollar for its own strengths and weaknesses. For flaws, there is a questionable growth outlook, a ballooning fiscal deficit and excessive stimulus is watering down the currency’s inherent value. Yet, despite all of these issues; the market is willing to overlook them and bid the dollar higher if its virtues are amplified. Given the financial rollercoaster over the past three years; it isn’t difficult to see that absolute risk aversion (where return is sacrificed for safety of funds) is the currency’s ideal scenario. Will we see this tomorrow? That depends on the EU.
Euro Traders Disappointed by ECB Efforts, Will the EU Compensate?
The bulk of the headlines this week related to the future of the Euro Zone and the euro have revolved around speculation as to which initiatives the European Union could push forward at the end of the week. However, with four comprehensive plans to rescue the region having already fallen apart; it is arguable that the European Central Bank has the greater fire power to offer a viable and lasting solution. The group certainly delivered meaningful support in this time around; but the changes nevertheless seem to have come up short of fully reviving confidence in the Euro-area’s markets and economy. President Draghi and his colleagues announced a 25 basis point rate cut to the benchmark lending rate, a new three-year unlimited liquidity program, a cut in the reserve ratio to 1 percent and easing in the collateral criteria for banks to draw loans. These are significant efforts; but optimists were expecting a larger rate cut and more importantly an expanded bond purchasing program. In fact, the group lacked a major for realized quarter percent cut and Draghi said he did not support an increase to the 207 billion euro bond holdings.
The ECB’s reticence to help the Euro Zone pushes the ball back into the EU officials’ court with the central bank head calling for greater fiscal consolidation and potentially treaty changes that would bestow more power to the European authority to enact sweeping policy akin to what the Fed is capable of. As for the Summit, the possibilities for a true solution to the long-term issues are slim. Increased funding for stimulus programs or guarantees would put the region in greater jeopardy of the critical downgrades that Standard & Poor’s has threatened. Common fiscal rules certainly helps prevent future issues; but it does not put an end to the current problems. The true help rests with the ECB; but that is at the very least later down the line. In the meantime, don’t write off a short-term, confused relief rally. Just don’t expect follow through.
British Pound Ignores BoE Hold, Falls in Sympathy to Euro Tumble
As expected, the Bank of England rate decision passed without event. With the European Union in disorder, Governor King (who has vociferously warned about the possible spread of financial crisis) would find good reason to sit back and await guidance from the ECB. It is important to remember that the UK is a member of the EU. The country will shoot down any EU-wide fixes that involve a financial tax.
Canadian Dollar Tumbles Alongside Risk, BoC’s Financial Warnings
The Canadian dollar was under pressure Thursday and the selling effort carried forward to into the early Friday session. Risk trends are the primary catalyst here as the investment currency (mainly through its commodity ties and yield premium to the US). Friday carries a lot of risk; but a clear sentiment bearing may elude us until after the market’s close. In the meantime, trade figures will take a back seat.
Swiss Franc Playing Safe Haven but EU Connections Too Concerning
The Swiss franc has played safe haven against nearly every one of its major counterparts – except for the dollar. The ECB efforts promise to fill out liquidity through the immediate future; but the underlying issues with investor confidence remain unresolved. If the EU fails to deliver a meaningful solution to building fears, it will be important to gauge the franc’s position as a safe haven against its EU influence.
Japanese Yen Volatility Against USD a Sign of BoJ Intervention?
The Japanese yen posted a remarkable rally against the US dollar this past session that was quickly reversed. It isn’t a stretch nowadays to entertain the thought that this could be an intervention move; but if we look across the more risk-sensitive dollar based majors, we see the same thing. This is an interesting move that suggests that organized risk aversion still seems to favor the yen over the dollar (carry unwind vs liquidity).