- Dollar Risks Tumble if QE3 Taper Talk or Capital Market Don’t Catch
- Euro Suspiciously Aloof About Broad Warning About Future
- Japanese Yen: Policy Officials Try to Talk Down Stimulus Risks
- Australian Dollar: Bond Sales Reflect Aussie’s Other Problem
- Swiss Franc Faces Another Volatility Spark in 1Q GDP
- Canadian Dollar Offered No Surprises from BoC Rate Decision
- Gold Activity at Two Month Low, Breakout Barometer High
Dollar Risks Tumble if QE3 Taper Talk or Capital Market Don’t Catch
The US dollar has done its best to run astray of the dogged strength of stimulus-backed risk assets. As of late, the bullish effort carried the currency to near three-year highs; but the market seems increasingly open to taking a breather. This morning, the Dow Jones FXCM Dollar Index (ticker = USDollar) slipped a gradual rising floor of support to trade back to 10,750. This is the edge of deeper retracement. The same risk is palpable for the currency’s major pairings. EURUSD has made a push back towards 1.3000, AUDUSD bounced hard from its multi-year support around 0.9550 and USDJPY is falling back towards 100 once again. After such an extensive move against the rudimentary fundamental backdrop, further climb requires real support. The longer we go without a firm drive, the higher the probability of retracement.
There are two fundamental themes that carry the necessary influence to keep the greenback’s buoyancy in place: risk trends and a building support for the Fed’s downshift in stimulus (now referred to as the ‘taper’). While we have seen some carry unwinding, short-term swells in volatility indexes and sharp moves in debt market (sovereign and high-yield corporate); we have yet to see the market-wide fear that undermines the center of moral hazard – the S&P 500. The dollar’s strength over the past month has ridden the wave of QE3 speculation. This past session, we heard Fed dove Rosengren suggest he could be open to tapering in a few months; but that sets no immediate time table.
Euro Suspiciously Aloof About Broad Warning About Future
The euro didn’t seem to put in for a dedicated move of its own this past session – and EURUSD notably closed Wednesday 0.7 percent higher. That performance belies the fundamentals we were seeing come from the Euro-area. From the OECD’s bi-annual growth forecast update, a hefty downgrade to the region’s 2013 GDP outlook (from a 0.1 percent contraction to 0.6 percent slump) speaks to the root problem for the world’s largest aggregate economy and its financial market. Elsewhere, the EU had to extend its allowance for members to reach their deficit targets while the ECB issued a financial stability report that warned the most stable conditions in two years were at risk of collapse.
Japanese Yen: Policy Officials Try to Talk Down Stimulus Risks
It is now commonplace to hear central bankers proclaim that they are monitoring for bubbles via stimulus and claiming that all the lights are still green. Japanese policy officials are no different. The alternative – to admit monetary policy causes problems and either market or economy may have to be sacrificed short term – is naturally unacceptable for a policy group that is charged with promoting stability through action and guidance. That being said, commentary from BoJ Governor Kuroda, Finance Minister Aso and others that suggests there is no problem in the extremely volatile JGB market and with the Nikkei 225 comes off as a willingness to ignore obvious risks. We have been told that increased bond purchases are possible, but that also bolsters inflation expectations and consequently yields…
Australian Dollar: Bond Sales Reflect Aussie’s Other ProblemThere are a few, plain fundamentals troubles for the Australian dollar: namely interest rate forecasts and risk appetite trends. As an investment currency, we need to know what kind of return the market can expect from the currency and how important that yield is compared to the commensurate risk it represents. Sentiment has trembled over the past few weeks, but it has yet to full breakdown. For the Aussie’s part, the probability of impending RBA rate cuts has backed off. Yet, we should also appreciate a third (constant) factor: who is participating. In the past few years, there has been a considerable ‘diversification’ effort to buy Aussie bonds and assets to provide yield to central bank and institutional portfolios. That said, a A$700 million, 14-year bond auction yesterday shows that is fading. Demand dropped and yields rose.
Swiss Franc Faces Another Volatility Spark in 1Q GDP
We learned earlier this week that Swiss data is not to be simply written off. The trade report released on Tuesday contributed to a steep franc selloff – its biggest daily tumble since December 2011. If that is a gauge of sensitivity and short-term volatility potential from the region’s docket, those trading Swissie pairs should be particularly wary of the upcoming 1Q GDP report. Expectations call for relatively little deviation from the previous reports 0.2 percent quarterly and 1.4 percent annual expansion measures. That means that the masses are poorly positioned for any significant surprises. Meanwhile, systemic change is afoot as the Swiss government has taken steps allowing banks to break the country’s secrecy laws and forfeit US clients’ information to US authorities – a serious change to this currency’s stature in the global market.
Canadian Dollar Offered No Surprises from BoC Rate Decision
There was a broad consensus that the Bank of Canada would hold its monetary policy bearings this past session, and they would not disappoint. This meeting was Mark Carney’s last as the head of the Canadian central bank, and there is rarely a dramatic change made by an outgoing leadership – especially when they have been incredibly consistent as the BoC has been. However, things become interesting from here. There seems an automatic assumption that incoming Governor Stephen Poloz will simply pick up where Carney left off with an eye towards the first rate hike. However, if new head – who did his PhD thesis on currency movement – joins the currency war fray…
Gold Activity at Two Month Low, Breakout Barometer High
Activity levels are cooling for gold. In fact, the rolling five-day daily range for the precious metal is currently just above $16 – a week ago it was $48. Similar measures of lethargy can be seen in the CBOE’s Gold Volatility Index as it eased back to three week lows (22.8 percent) while volume on both futures and ETFs have dried up. Under normal circumstances, this could be construed as a simple return to ‘typical’ trading levels. However, both the technical wedge pattern seen on the chart and the fundamental risk of volatility to the dollar point to the same thing –gold is at high risk a sudden as it breaks free of its boundaries. The more academic fundamental conversation tends to debate the dedicated ‘physical’ buying and short-term ‘paper’ trading, but the breakout we find from this hold is unlikely to hold to such high-minded debate. The metal’s sensitivity to the dollar is the greatest threat to quiet a quiet.
Building Approvals (MoM)
Dropped to 09/12 level in a sharpest pace in a year; Recent rate cut may revive the housing market.
Building Approvals (YoY)
Private Capital Expenditure (1Q)
Fell to 06/10 level, indicating companies’ cautious sentiment towards future demand.
Gross Domestic Product (QoQ)
Stayed below 0.6% for 8 quarters.
Gross Domestic Product (YoY)
Showed improvement for 3 consecutive quarters.
Lloyds Business Barometer
Companies’ optimism has improved for 3 consecutive months.
Euro-Zone Industrial Confidence
European flash PMI showed improvement, though GE and FR disappointed; All euro-zone countries remained contractionary; More stimuli from ECB could improve sentiment, as Praet hinted on more lending and new policies to maintain price stability.
Euro-Zone Consumer Confidence
Euro-Zone Services Confidence
Euro-Zone Economic Confidence
Euro-Zone Business Climate Indicator
Current Account (BoP) (Canadian dollar)
A significant component to Friday’s1Q GDP figure. Deficit since 4Q 2008
Gross Domestic Product (Annualized)
Stronger-than-expected economic growth could lead to risk aversion as investors fear reduction in bond purchases, while it will be USD positive.
Core Personal Consumption Expenditure (QoQ)
Initial Jobless Claims
Have recently advance from multi-year lows.
Pending Home Sales (MoM)
Lower than 12-month average since 01/2013.
Pending Home Sales (YoY)
Terms of Trade Index (QoQ)
Heavily rely on Chinese growth and productivity.
GfK Consumer Confidence Survey
Declined slightly after holding steady for 3 months.
Nomura/JMMA Manufacturing PMI
Indicative of the stimulus impacts on manufacturing activities.
National Consumer Price Index (YoY)
Deflation shown in national CPI data has worsen, declining for 4 months; The lack of improvement in deflation will cause the BOJ to adjust the timing to achieve its 2% inflation target and may expand its bond purchases program.
National CPI Ex-Fresh Food (YoY)
National CPI Ex Food, Energy (YoY)
Tokyo Consumer Price Index (YoY)
Household Spending (YoY)
Surged to the highest level since 2004.
Unemployment rate dropped to the lowest level since 11/08; Steady uptrend in job-to-applicant ratio,
Industrial Production (MoM)
Slow growth as demand mainly comes from US, but sluggish demand from Europe and China.
Industrial Production (YoY)
Upcoming Events & Speeches
RBNZ Publishes Assessment of Currency Flows
Japan Cabinet Office Conference on Policy
BOJ Deputy Governor Nakaso to Speak at Forum in Tokyo
ECB’s Costa Speaks on Portugal and EU