Dollar Finds A Bid As US Stocks Drop

There is a serious rumbling in risk trends for the global markets, and the dollar will be one of the front-line measures for sentiment moving forward. We know the greenback as the Forex market’s preferred safe haven, but its true appeal is as a ‘currency of last resort’. A move that sees the dollar surge against all counterparts would speak to a disorderly market crunch that reaches beyond regular risk-based trends. Instead, the combination of performance we’ve seen through this past session speaks to a fundamental performance that offers greater follow through potential. From the carry trade angle, the greenback showed the best performance: a 2.1 percent rally against the New Zealand dollar, 1.9 percent versus the Aussie dollar and 1.2 percent when matched with its Canadian counterpart. The fundamentally questionable – but unmatched for liquidity – EUR/USD showed a more restrained 0.6 percent dip. It was USD/JPY’s 1.6 percent decline – the biggest in six weeks – that real speaks to true risk aversion. The preference for the yen on this pair reflects ‘orderly’ carry unwind rather than systemic panic.

The safe haven watch has begun. In the coming session, we will look to measure the breadth of the financial market’s deleverage from risky exposure. Having seen the dollar climb, yen crosses drop, US equities tumble, the 10-year Treasury yield slide and commodities hammered; there is a uniform effort to avoid risk. The next level of escalation would be to see key technical breaks along with meaningful momentum to fully establish commitment. There are highlights on the upcoming docket that can provide that can tap into confidence including the IMF’s world economic outlook update, a continuation of 1Q earnings season (Goldman Sachs and Intel) and numerous Fed policy officials scheduled to offer up commentary that can further destabilize resolute expectations of unlimited stimulus support.

Gold Collapses as Traders Contemplate Lasting Bear Trend
If you thought gold’s plunge Friday was incredible, the 9-plus percent collapse in the spot price for the commodity Monday left most speechless. On a percentage-basis, that was the biggest drop for the metal in three decades; and notionally ($135), such a move is unprecedented. Put another way, this global standard lost more than one-seventh of its value in just two trading days. Where we go from here depends on two factors: the level of panic behind positioning changes and the fundamental drivers that come in to further back the move. In the current rout, we are seeing more of a disorderly unwinding than a thematic shift that pulls capital away.

The wave of selling seems to have started with a round of large sell orders (institutional exposure) that crossed through the futures market Friday. This push subsequently forced prices below the $1,525 / $1,500 range low that had kept a floor under the market for more than 18-months. It should come as little surprise that there was a significant round of stops for bulls (and short entry orders for bears) just below the well-worn support zone. With futures volume of over 700,000 contracts on the CME, turnover on the follow through move Monday was 50 percent larger than the previous record. In other words, many of those that hesitated exiting gold hoping for a rebound jumped out in a panic. The deleveraging aspect can last for some time given the metal’s colossal rally from 2008 to 2011. However, such a move is more likely to snuff itself out quickly. Concerted and long-term selling pressure comes when gold’s underlying value is damaged. That said, such extreme volatility certainly negates an assets appeal as a viable store of wealth as well as ability to hedge inflation properly.

Japanese Yen as G20 Warns Against Driving Yen Lower
Despite the fact that the yen crosses were running multi-year bear trends through the past year, the 160-pip drop from USDJPY Monday was the biggest since May 20, 2010. What makes this move particularly interesting is that it was a yen-based move that was clearly measured across all its most liquid crosses. The impetus for the move was two-fold. The risk aversion drive reminds FX traders that carry on these crosses is still just off record lows. The more interesting driver is a fresh warning from key G20 members of their displeasure with the BoJ’s yen targeting.

Euro Traders Watch German Vote on Cyprus, ECB Draghi Testimony
Despite the move to deleverage risk exposure and the Euro’s ongoing fundamental troubles, the shared currency managed a relatively mixed session Monday. When the source of consternation isn’t originating with the euro, it seems the market is willing to overlook its quibbles and focus on its liquidity. This detachment may not last however. In the immediate future, we have event risk that includes the German Parliament’s vote on the Cyprus bailout, ECB President Draghi testimony, a Greek bond auction, the ZEW survey and regional CPI data.

British Pound Takes Inflation Temperature but Wednesday Heavy Day
As a relative safe haven for Euro-area investors, the pound found an encouraging capital flow Monday that lifted gilts (UK Government bonds). If this connection is to extend, we will need to see more concerted euro-based concern rather than general risk aversion. In the meantime, fundamental traders should watch the docket. The upcoming CPI data is notable rate speculation, but it’s Wednesday’s BoE minutes that matter.

Australia Dollar Shows Biggest Drop in 17 Months, Biggest Relative Drop in Years
Under a cloud of risk aversion, it should surprise no one that the Australia dollar was under pressure. On a notional basis, the near 200-pip drop from AUD/USD was the largest in 17 months. Yet when we compare this move to the relative price action of the past month, this drop is far more remarkable. When measuring performance on a relative basis (compared to price action over the previous month), this was the biggest tumble in years. As the capital gains behind AUDUSD take a hit, traders will become far more critical of the historically-low carry differential levels.