Talking Points:
- Dollar Finds No Traction on Yellen’s Support for Hawkish Shift
- Euro Tuned into Greece Reform Review, Fear Fading Fast
- Australian Dollar Jerked Higher By Chinese Manufacturing Report
Dollar Finds No Traction on Yellen’s Support for Hawkish Shift
Fed Chairwoman Janet Yellen delivered her testimony before the Senate Banking Committee Tuesday and the content of her remarks seemed to reinforce a position the market has been acclimating to: that a rate hike is soon at hand. Despite Yellen’s and her colleagues’ efforts to acclimate the market to an impending tightening of monetary policy however, we have seen the market’s response moderate as the probability rises (and the time frame shortens). On the one hand, we could consider this evidence that the market has already fully priced in the eventual shift in policy regime after a seven-month USDollar rally (a record-breaking move). Yet, that doesn’t fully pan out when we consider speculators’ response – or lack thereof – in capital markets as well as instruments designed to price and hedge interest rate movement. More likely, we are likely seeing an asymmetrical response to rate bearings across different markets. The Greenback has priced more fully a first move by mid-year from the Fed because its peers (Euro, Yen, Aussie, etc) are facing a heavily contrasting dovish regime. Other markets have a threshold that needs to be overcome before they properly respond: complacency in moral hazard. That may not come until closer to launch date.
Looking out over the coming trading sessions, the Fed Chair will run the gauntlet of questions in her second day of the Humphrey-Hawkins testimony before the House. The quality of the questions and her answers are unlikely to change much from the cautious preparation she has tried to weave. Perhaps a more capable and clear-cut catalyst for leveraging rate speculation for market drive will be Thursday’s January CPI reading. The market’s favored inflation reading (though not the Fed’s), a big deviation here could stoke the fires – bullish or bearish.
Euro Tuned into Greece Reform Review, Fear Fading Fast
After a tense few weeks, Greek and Troika officials hailed progress in a deal to extend support for the Eurozone’s most troubled country this past week. Yet, in the agreement struck, there was still a demand for details on reforms. According to Eurogroup President Dijsselbloem, that list was received Tuesday morning and EU ‘instructions’ were reviewing it – though he said they were “quite positive”. This could have been a source of strength for the Euro – moving closer to a more permanent period of stability – had the market priced greater risk into the crisis phase. However, Euro cross implied volatility showed little fear even before last Friday. Currently, 1-month EURUSD implied volatility is at a 2015 low.
Australian Dollar Jerked Higher By Chinese Manufacturing Report
There was Aussie data crossing the wires this morning and Chinese data. The latter would end up motivating the Australian currency. From the AUD docket, top listing was the 4Q wage price index – an upstream inflation measures for a currency that experienced a rate cut at the previous RBA meeting. The 2.5 percent pace was in-line with expectations but the weakest reading in the over a decade. This did little to ramp rate cut fears or stymie the Aussie. That said, the Chinese manufacturing PMI for February helped push AUDUSD above 0.7850.
Chinese Renminbi Drops Despite Strong PMI Reading
Where the Aussie Dollar may have benefit China’s factory activity report – despite the new export orders measure swinging to a contractionary reading – the country’s own currency didn’t fare as well. USD/CNY was up 0.2 percent to 6.2719. A manufacturing PMI read of 50.1 denotes growth (anything above 50), but the reading is not particularly robust especially in a holiday period. Meanwhile, the MNI consumer sentiment survey continues to flounder near its series’ low with a 112 reading for the February update.
British Pound as Indecisive as Dollar On Monetary Policy View
While the Bank of England may not be crafting a time-dependent a market forecast as the Fed (ironic as both claim not to precommit), we continue to see the MPC warn that a hike may still be in the works this year. At testimony in Parliament, Governor Carney reiterated a focus on underlying inflation trends. Despite their efforts Short Sterling futures are still not fully pricing a full hike until 2016. Room to converge.
Emerging Markets: South African Rand Rallies on GDP, Russian Ruble Steady after Downgrade
The MSCI Emerging Market ETF finally cleared over a week worth of congestion by rallying 1.4 percent to its highest position in a month. With volume behind this month nearly doubling the past week’s average turnover, the drive carries heft. That said, further progress requires a confidence in general sentiment that may beyond the market’s current capacity for sentiment. On the FX side, the EM currencies have done well[ this past session. Amongst the top performers are the South African Rand which rallied 1.4 percent versus the USD after 4Q GDPbeat expectations and the Russian Ruble whose 1.3 percent swell is more appropriately a stabilizing move following the slide suffered following a weekend announcement of Moody’s downgrade for the country. Now two rating agencies have labeled Russia debt as ‘Junk’.
Gold Tempting a Rebound Against Questionable Speculative Support
Gold is currently attempting to forge its biggest rally since the January 30 surge. Though still moderate at 0.8 percent this morning, the precious metal’s move stands out against the series of four consecutive declines and the many failed attempts at intraday rallies through that period. In the fundamental backdrop, this drive may struggle to maintain its early swell without additional support. From a fiat-degradation perspective, the Fed Chair took a stance that furthers the possibility of a rate hike a quarter out and Greece moved a step closer to compromise to withdrawal an impending financial crisis. That said, the Dollar was not heartened by the central banker’s comments and continues to trade heavy. If USDollar finally does drop, it could give gold a serious boost. Meanwhile, speculative appetite needs to be closely monitored. Where ETF holdings of the precious metal continue slowly rise off multi-year lows, COT figures showed the biggest two-week drop in spec interest in over a decade.