Dollar Advances A Third Day As S&P 500 Returns To Critical Level

Has the market already fully discounted the impact of the Fed ‘Taper’? With the S&P 500 charging higher on its strongest three-day rally in five months, it seems that investors have accounted for – or simply forgotten – the detriment of a smaller stimulus backstop.

In the past weeks and months, there has clearly been a positioning shift in recognition that the world’s largest central bank would eventually wean the market of its dependency on supranatural support. The most dramatic adjustments were seen in those assets that were most distinctively exposed either as particular Fed assets or simply via excessive exposure / leverage. The iShares-Barclay’s mortgage-backed securities (MBS) bond fund has retraced half of its gains since 2009 and the 10-year Treasury yield has risen 65 percent in eight weeks. Those are assets the Fed is directly buying.

A peak-to-trough 7.5 percent retracement in the S&P 500, 3.2 percent EUR/USD drop and average 6.7 percent correction from yen crosses (carry trade) is comparatively tame. A deeper risk aversion move is highly likely, but the taper catalyst may have been used up.

Euro: It’s Core Versus Periphery Eurozone Once Again
It has been said many times before that there is a two-speed recovery in the Eurozone. That split is more obvious now than ever – and that should concern investors. This past session was chock-full of event risk to update us on the region’s health.

On the positive side, the region’s largest economy – Germany – reported an unexpected 12,000-position drop in unemployment that set the jobless rate at 6.8 percent in June – near the lowest rate Unification. Furthermore, the broader region’s economic confidence survey for the current month would also rise to the highest level in 13 months. Unfortunately, crises arise from the weakest links - not the strongest. Ireland – expected to soon exit the comfort of its bailout program – reported 1Q GDP with a hefty 0.6 percent economic contraction alongside a sizable downward revisions to the previous period’s reading. News is circulating that the Greece government is at risk of seeing its second largest privatization deal falling through and delaying necessary aid. And, Cyprus was approved for its €1 billion debt swap – while central bank data showed massive deposit outflows.

Japanese Yen: Market Weighs BoJ Success in Dense Round of Data
The Japanese yen took the title for worst performer of the day Thursday. The rebound in deflated risk positioning similarly bolstered the carry trade with gains for the yen crosses ranging from 0.3 percent for GBPJPY up to 0.9 percent for EURJPY.

Over the past month, we have seen a varied degree of response to the sentiment exhale and stimulus withdrawal. Far from the extremes of high-yield debt and US Treasuries’ performance, the yen-based carry trade has held relatively steady. The carry these pairs offer is historically low, but the deleveraging pressure is tempered by the BoJ’s efforts to beat deflation and thereby drive their currency down. How well are they don’t in this endeavor? Aside from the yen’s titanic move through May, we were updated economic data this morning that shows very early but encouraging results.

New Zealand Dollar: Does the RBNZ’s Announcing Intervention Help?It seems direct intervention will be the norm for the Reserve Bank of New Zealand. According to the central bank’s Currency Flows report released Thursday morning, the group bought NZ$90 million in May. The bullish pressure this imparted on the kiwi was clearly minimal as NZDUSD dropped 7.2 percent and NZDJPY 4.2 percent through the period. We can thank the troubled global financial sentiment during the period which set off carry unwind that generally overwhelms all else. That said, it is worth noting that central bank saw its intervention capacity rise to NZ$8.83 billion (from NZ$8.48 billion). Intervention is likely to become a more frequented tool for the RBNZ – as it has globally. Yet, will it really give the bank much influence? April’s N$256 million is a good reference – far too small to offset a serious ‘risk on’ move.

British Pound Drops Against Most of the Majors after GDP Revision
With the exception of the ravaged Japanese yen, the sterling slid against all of its counterparts this past session. Top event risk was the final reading of the UK’s first quarter GDP report. While the first – or flash – reading carries the most influence as it sets speculators’ forecasts for deeper fundamental themes, the details can often carry clues for near-term shifts. While the quarterly pace of expansion was unchanged at 0.3 percent, the year-over-year read was cut in half – also 0.3 percent. Meanwhile, the period’s disposable income dropped an astounding 1.7percent – the biggest collapse since 1987. Even if the economy were to turn to growth form here, starting from a weaker platform will undermine the effort. Yet, is it enough to flip the switch at the BoE? Next week’s policy meet is Governor King’s last. Now it’s Carney’s turn.

Swiss Franc: EUR/CHF Resolves Congestion, Swiss Companies Concerned
The Swiss franc fell against most of its counterparts this past session, but the biggest and most fundamentally profound move would come via the Euro. Having worked its way into a make-or-break position, EUR/CHF resolved with a break above 1.2300. The impetus for this move was more likely technical in nature, but the bearing is undeniably founded on fundamentals. While Euro-area troubles are starting to percolate once again, the market’s disregard relieves the franc of its local safe haven status. Even if the fear of financial rout were injected into the market, the currency may still not play to its traditional capital harbor status. The SNB bulletin this past week revealed that the country’s corporations were concerned about the effects of changes to regulations and proposed tax laws – including opening banks’ books to foreign governments.

Gold Struggling around $1,200 Just Before the Quarter End
There seems to be no level that is sacred for the gold market since $1,500 collapsed and a tidal wave of deleveraging followed. The precious metal fell 2.1 percent Thursday for the fourth consecutive tumble. Through the session’s low - $1,180 which also happens to be the lowest since August 2010 – gold has plummeted nearly 9 percent for the week. Crashing through multiple psychological level during possibly the worst weekly performance in 21 months (generations if we close below $1,185), it is clear that we need to look beyond support and resistance. Continuation or reversal depends first on momentum. It is worth nothing that immediate selling pressure when the metal slipped below the $1,200 level was relatively restrained – unlike what transpired at $1,500, $1,400 and $1,300. This may be a sign that the deleveraging may be easing as panicked bulls refrain from placing large batches of stops below even numbers. That said, exceptional volatility has permanently altered this commodity’s role in the current market cycle – it is clear that this is not a practical, alternative store of wealth.