Dollar Gains On S&P 500, Euro Tumbles
A global slump in equities and key reversal from the EUR/USD before reaching 1.4000 speaks to the exact mix we would expect to jump start a significant dollar recovery. Yet, the greenback’s individual performance this past session lacked the clarity and conviction general risk trend and the FX market’s most liquid pair were displaying. In fact, through Thursday’s session, the dollar finished lower against most of its counterparts and the Dow Jones FXCM Dollar Index slipped for a second consecutive day. To this point, the benchmark currency has readily responded to favorable changes in sentiment trends and yield forecasts – while simultaneously curbing the ill-effects of detrimental developments. While this may initially reflect doubt over the financial markets’ willingness to commit to systemic deleveraging or perhaps preoccupation with forthcoming event risk (Ukraine’s referendum or next week’s FOMC), it may also be a characteristic change.
If the dollar is to play the role of a safe haven, the market must in fact need a harbor from a perceived threat. Measuring the market’s level of fear this past session, there was more convincing evidence of a significant jolt to investor poise than even the January slump. The anxiety seven weeks ago was wrung from the emerging markets. There is a similar element this go around as the Ukraine standoff with Russia over Crimea continues, but it is not the only exposed nerve. As global powers trade threats of sanctions and the market awaits the planned weekend referendum; the market is also reminded of China’s economic cooling and financial squeeze, a distinct rebuke of stimulus by the major central banks, and the record deployment of leverage in the market. A flare up from any of these individual sources – or any headline that carries global ramifications – will have plenty of dry dynamite to set off.
Looking ahead, the scheduled event risk is light before the end of the week. The University of Michigan consumer confidence report for March may offer some insight into the economy’s resilience as the Taper takes effect, but its entire impact is unlikely to reach beyond a short-term volatility response to any substantial deviations from consensus. Many will be watching the international headlines over the weekend to see what comes of the planned Crimea referendum to join the Russian Federation on Sunday. For EUR/USD and the dollar, Wednesday’s FOMC meeting will set the tone for moral hazard and relative rate expectations – a comprehensive event risk.
Euro: Has Draghi Marked the ECB’s Tolerance for Gains?
Since the ECB announced last week that it would leave its monetary policy course unchanged, we have seen the EUR/USD inch closer and closer to 1.4000. Without a substantial piece of event risk or a strong countercurrent from the dollar to turn the tide, it seemed a push to the big figure was inevitable. Policy officials must have feared the same, so they upped the rhetoric this past session and the pair collapsed 120 pips from its two-and-a-half year, overnight high. We have heard numerous ECB officials caution that further policy actions were a possibility if the economy strayed from its goals moving forward, but actions (such as last week’s hold) speak louder than words. The market had all but decided to write off any further verbal cues from the central bank until President Mario Draghi remarks made the currency to policy connection by saying it was sabotaging price pressures. We will see if the market tries to push this still ‘veiled’ verbal intervention.
Yen Crosses Tumble on the Day as Nikkei 225 Breaks Floor
The global tumble in equities led to a number of nasty spills Thursday, but few made the kind of technical splash that the Nikkei 225 saw. The index’s fourth consecutive decline cleared the bullish channel the market had depended on since seeking a bottom at the beginning of February. Given the yen's crosses correlation to the Japanese equity benchmark, the slide from the crosses doesn’t surprise. The consistency of the move, though, should be noted. This uniform yen retreat is pushing these pairs dangerously close to far more critical breaks.
British Pound Awaits Trade Friday, Event Risk Heavier Next Week
The final trading session of the week brings with it a last rush of UK data. Pound traders will certainly take in the January trade figures as another building block for their interest rate expectations – though there will be far greater impact to data that undermines the inflated yield outlook. Next week, the rate forecasts will be top of the mind for the sterling with BoE minutes, jobs data and the budget announcement due.
Australian Dollar Up Against Most Counterparts Despite Risk Lean
On a day that we would readily call ‘risk adverse’, we have seen something very unusual – the Australian dollar is up against all its major counterparts with the exception of the yen. We have seen the carry currency steadily break ranks with its traditional investment appeal for some time, but this is particularly remarkable. If the market diversifies away from over-leveraged risk exposure, the AUD may actually draw funds…
New Zealand Dollar Withstands Equity Stumble with Help from Rate Forecast
It helps that the day before a market-wide risk tumble that the New Zealand dollar was fortified by an RBNZ rate hike. It is rate of return versus appetite for yield at the moment, and the kiwi is attempting to compensate. Looking at swaps following the first hike in a regime, the market seems almost certain of a follow up hike in April. Meanwhile, next week brings 4Q GDP and current account reports.
Emerging Markets Drop, Currencies Mixed
Despite the exceptional level of conviction measured in global equities, it seemed risk aversion didn’t send the emerging markets into a panic. While the MSCI Emerging Market ETF dropped to a fresh month low, its currency ranks were a mix. Social and political turmoil seems to be an additional component, but not a certainty for resignation. China and Ukraine will continue to dominant headlines through the weekend.
Gold Extends Six Month Highs on Strongest Run in Over Two Years
Spot gold rose for a third consecutive day Thursday – though the pace was noticeably tempered. The ECB’s threat to check rates is a fiat distortion consideration that alternative-store-of-wealth advocates jump on and the Crimea situation offers temporary safety from geopolitical exposure in the world’s fiat-safe havens. This week has pushed us to a six month high and maintained the strongest run since 2011.