Dollar Looks For Follow Through On S&P 500 Drop, Fed’s QE3 Shift

Event risk through the final session of the trading week drew a lot of excitement and volatility for both capital markets and the greenback. The March nonfarm payrolls (NFPs) was the topic du jour, and its implications for the Federal Reserve’s monetary policy moving forward insured all traders were paying attention. The data was an interesting mix with the 88,000-position net increase in jobs significantly missing forecasts and portending a material slowdown in economic activity. This negative interpretation was enough to shake the S&P 500 and broader equity market to a tentative – but aggressive – downdraft. Risk aversion certainly plays to the dollar’s appeal, but it is the stimulus implications that investors truly care about – be they equity or currency traders. Despite the poor payroll showing, the jobless rate ticked down to a fresh four-year low 7.6 percent clip. And even if it hadn’t, would that be enough to offset the material change in the policy group’s attitude as of late? A tempering of QE3 within months seems highly likely, and the implications for risk trends and money supply are crucial.

Japanese Yen Suffers Biggest Weekly Drop in 3 Years, Does it Continue?
The yen’s performance through the end of the week is befitting of its fundamental developments. USD/JPY posted its biggest weekly rally (3.6 percent) since December 2009 while EUR/JPY offered up its second biggest rally (5.0 percent) on record. With the Bank of Japan adopting a policy similar to that which has leveraged US equity indexes to enviable record highs and depressed the value of the dollar (particularly against the yen) to record lows, the path may seem clear. However, it is important to remember that there is a short-term and long-term impact from this policy shift. Over time, officials will effectively boost local markets and water down the currency. But, in the short-term, the currency has dropped 20-25 percent in less than six months. All it would take is a risk aversion move in global capital markets to spur a yen-based carry unwind.

Euro: Policy Officials Set the Wheels Turning for Possible Policy Shift
It was an unusual end for European markets Friday. While the Euro extended its rally against the US dollar, the region’s equities market suffered their biggest drop of the year at the same time sovereign bond yields fell. If the region’s financial stability was seen to be improving (implied by lowering borrowing costs for the region’s governments and a drop in the financial sectors default insurance rates), we would expect to see equities climb as well. More likely, we are seen the disjointed influence that the region’s support has. There are no shortage of issues still looming over the market (Greece is meeting with the Troika over the weekend, Cyprus extended its capital controls another week, Italy is still trying to work out a government, Portugal’s constitutional court rejected parts of an austerity bill, etc), and it is only a matter of time before another shock is delivered to the system. Under these conditions and downgraded growth forecasts, the ECB is more likely to provide support in the form of stimulus support moving forward. That probability is not fully appreciated, but it may soon become more obvious.

British Pound Gains Traction as FTSE100, Gilt Yields Tumble
The pound finished the week bullish across the board with a notable GBP/USD break above 1.5250 to lead the drive. There is no doubt an element of Euro-sympathy to this strength, but there is more to the drive than just riding the shared currency’s coattails. Carrying forward the reality that the Bank of England (BoE) is not keen on competing with stimulus on the global stage after it held its benchmark – despite allowances by the government to pursue easing more aggressively – there is short interest that can still be unwound to better represent the sterling’s impressive stimulus backdrop. That said, concern that the BoE will not back up the government’s austerity effort is contributing to the FTSE100’s heavy trend change. An atmosphere of regional (European Union) financial trouble is another factor that can ward of domestic concerns with a sterling safe haven appeal. However, a financial stability versus small balance sheet equilibrium is difficult to sustain.

Canadian Dollar Takes Heavy Blow from Sharp Jobs Drop
As has become the routine over the past months, the Canadian employment figures were exceptionally market moving for the loonie this past Friday. Modest expectations (a net 6,500 increase in positions) made it easy to feed surprise with a massive 54,500 drop in jobs. The drop was a stark contrast to the previous month’s comparable increase and was ultimately the biggest decline since February 2009 – during the height of the global recession. The jump in the jobless rate to a 7.2 percent clip and increase in the national trade deficit to C$1.02 billion sets a sour note for a country/currency that has been treated as immune to global troubles.

Swiss Franc: SNB Currency Reserves Hit Fresh Record as EURCHF Eases
There were plenty of distractions to through the final session of this past week to miss a notable update from the Swiss docket. According to the Swiss National Bank (SNB), the nation’s total holdings of foreign currency reserves – the byproduct of their effort to keep EURCHF from breaching 1.2000 – unexpectedly increased to a record 438.3 billion francs in March. While the key exchange rate hasn’t returned to the artificial floor, it has shown a tide change that threatens to return with the next wave of Eurozone troubles. Given the lingering issues in Italy, Cyprus, Greece, Spain and other EZ members; the appetite for safety is there. Swiss government and market rates are once again both negative in a clear sign of capital flow towards safety – so robust that paying for the privilege is acceptable.