Dollar's Rebound Stalls as Equities Bounce
The dollar’s three-day advance was brought to close before the market had to really question its intentions for developing a new, lasting trend. As it happens, the tumble in equities (a proxy for investor sentiment) leveled off just before investors would start claiming a major break had been made. These are fluctuations within low-restraint technical boundaries – exercising the market of its natural volatility without making the jump in conviction necessary to establish lasting trends. Risk bulls frustrated by pace and bears who await their cue for a turn are asking the same thing: when does the dithering end and commitment begin?
There are few themes that can inspire a uniform awakening to a common fear/hope from global investors, but risk trend and monetary policy are the stalwarts. The trouble is the catalysts. A uniform slip in ‘higher return’ assets from equities to yen crosses to emerging markets this week has stalled before it has turned into a self-feeding cycle of deleveraging. The most pressing threat this week remains the geopolitical and leverage feedback loop from the emerging markets through the Ukraine standoff with Russia over Crimea. Yet, even though the confrontation remains, developed world risk has smoothed over the threat quickly. This is a significant contrast to last August where capital flight from India inspired a market-wide stumble and near-5 percent correction from the S&P 500.
Aside from a ‘trip and fall’ start to a sentiment-based move, the best potential for fundamental encouragement comes through monetary policy expectations. This past session, we have seen the first developed economy central bank (the RBNZ) switch to a tightening regime. While we are a long way off from the global shift to higher yields, the contrast to the Fed’s position is nevertheless clear. Next week, we have the next FOMC meeting with new forecasts and new Chair Janet Yellen’s first press conference. Before we hit that high profile event, the upcoming session will offer up the Senate confirmation hearing for three Fed board candidates in Fischer, Brainard and Powell. Will these three accelerate the first rate hike or stymie it? Meanwhile, import inflation and retail sales are top data listing.
New Zealand dollar: RBNZ Hikes and Douses Volatility
Have we seen the turning point for global interest rates? The first of the major central banks lifted its benchmark lending rate this morning – and the RBNZ has made it clear that this was a regime rather than a one-off. Since the Great Financial Crisis (GFC) through the opening months of 2009; monetary policy authorities have stuck to exceptionally accommodative policy to support financial stability, growth and inflation. Yet, five-years on, there is heavy debate over the need and efficacy of maintaining the ample stimulus. This is just the beginning of a larger fundamental discussion that will unfold over months. In the meantime, the first mover on such a systemic shift typically leads the tremendous shift in capital. Yet, there was a tangible lack of progress found from the kiwi to the confirmed 25bp hike to 2.75 percent. Why? The market had fully priced in this hike – and had further priced in 135 bps worth of easing over 12 months. RBNZ Governor Wheeler said he suspected rates could rise 200bps through 1Q 2016 (a repeat) but an extreme would be 125bps in hikes through 2014. He endeavored to ‘meet expectations’.
Euro Keeps the Pressure as Market Rates Rise
Since the March 6th ECB rate decision – in which the central bank caught at least a quarter of the market off guard by holding monetary policy – we have the euro advance against most counterparts (1.2 percent for EURUSD). A hold in policy is a bullish outcome from the euro as the passive status sees the central balance sheet continue to shrink – and for traders, market rates rise. Since that move, the three-month Euribor has risen to an 18-month high. Ahead, we have the ECB report, EZ economy survey and Ireland 4Q GDP to take a swing at rate forecasts.
Yen Correlation to Nikkei Keeps Attention Away from Data Cries for QE Upgrade
Not two days following the Bank of Japan decision to stay the course on policy and further deflate speculation of a QE upgrade, we have seen a February consumer confidence report for Japan drop to its lowest level since September 2011. Japanese and investors are preparing for a tax hike come next month, but confidence in a stimulus move to offset it continues to drop off. We may not need a risk drop to unwind this carry.
Australian dollar Rallies after Jobs Data Hits, China Numbers Due
There is a range of event risk that poses a volatility risk to the Australian dollar. The first release out of the gate – the consumer inflation expectation report for March – was overlooked in spite ofa disappointing 2.1 percent print. Far more engaging was the February jobs data which compensated for the unemployment rate holding at a 10-year high 6.0 percent with payrolls beat (47,300 jobs added) three times larger than the consensus. This drive moved us to the precipice of an Aussie rally. Perhaps upcoming Chinese retail and factory data can push us over.
Emerging Markets Disengage from Hot Spots to Focus on Traditional Risk Trends
The emerging market currency list was an even split this past session. The South African Rand and Brazilian Real – known ‘risk’ currencies in the EM hierarchy – posted gains on the day. The Asia-area EM currencies, however, did not cope as well. Preoccupation with traditional risk trends has returned, but don’t write off an issue like a devolving situation in the Ukraine. That is still a smoldering volcano.
US Oil Drops Further as US Announces Strategy Reserves Release
‘Supply’ assumptions jumped for the US energy market Wednesday. Not only did the US Department of Energy report a sharp 6.2 million barrel increase in weekly inventories – the third biggest jump in 18 months – the US government announced its first test sale from its strategic reserves since 1990 (though only 5 million barrels). The US to UK – WTI to Brent – spread has widened nearly $4 from last week to $10.
Gold Working on Closing its First Six-Week Advance Since 2011 Record Highs
A 1.3 percent advance from gold this past session closed out a key break above $1,350. This is a move originating from speculative appetite in contrast to the market’s demand for a non-fiat safe haven in the 2008-2011 bull wave. While this represents questionable long-term potential, it is still driving the metal to its sixth weekly advance. We haven’t see such a consistent run since August 2011…when we set record highs.