Dollar Posts First Gain in Four Days, Treasuries Lose Rate Drive

After a three-day tumble, the dollar finally recovered its balance Tuesday. The momentum behind the currency’s performance was encouraging, but it was the breadth of the drive that was truly impressive – whether measured against high-yield or safe haven, the greenback posted gains. However, one day does not make a trend. A bullish correction in current market conditions is about as convincing as a bearish retracement in a short-lived run. Congestion dominants, and tentative drives by bulls or bears dry up well before a meaningful trend takes. As usual, the greatest threat to (promise of?) breaking this equilibrium is tipping the equilibrium on underlying risk appetite trends.

Yet, we are receiving mixed signals on investor sentiment. Where the carry trade and energy futures complex have turned to consolidation, the S&P 500 continues to slow but steady march higher. The disparity in this normally tight correlation for capital markets (sentiment ultimately determines the flow of capital) has preceded major trend shifts in the past, but it is more appropriately just a side effect of flat-lined risk trends – which can end with continuation or reversal. Looking for the next catalyst to rouse global sentiment, there are no key highlights on the docket that we can reasonably rely on. Therefore, in the absence of an unexpected catalyst that has implications for the world’s financial health, chop and false breakouts could be the order of the week.

That said, subdued sentiment tides doesn’t prevent the dollar from generating its own volatility. The entire world has a stake in the Fed’s stimulus efforts (the emerging markets are decrying the capital influx, developed countries hope they will supplement their own policy), and there is still considerable speculation over whether QE3 is still in the cards or the next move will be a hike. That said, the 10-year Treasury yield’s incredible 9-day run finally stalled (just short of a record) and the 2.4 percent October high remains intact. That first pang of fear that QE3 won’t come was bound to be loaded, but leveraging the shift in expectations takes a lot more than say Kocherlakota’s warning a 2012 hike is possible.

British Pound: What is the Volatility Potential in Budget, BoE Minutes?

The sterling was one of the most fundamentally-loaded currencies over the past 24 hours and it promises to be one of the busiest over the coming 24. This past session, rate watchers (policymakers and traders) were watching the February CPI figures. Both the headline and core readings of the annual CPI figures cooled as expected. So, while inflation is still above the MPC’s comfort zone, their habit of tolerating short-term pressure under the assumption that it will reach its target over the medium-term actually works against holdout hawks. Looking ahead, skepticism will likely be confirmed by the BoE’s minutes, which will be held up against the ECB’s own hawkish commentary at its last meet. The more ambiguous event for the upcoming session – and thereby carrying more market-moving potential – is Chancellor Osborne’s presentation of the budget. Will he keep a tight rein on the austerity or will growth and Euro Zone concerns encourage accommodation?

Euro Joins Dollar, Advances Against Most of its Counterparts

Without an imminent fear of the Euro Zone’s financial health, headlines that crossed the wires this past session would gain any traction in price action. News that Finance Minister Venizelos tendered his resignation didn’t cause any waves as it was expected he would exit to lead his party. And, just as surely, stories about the market pricing in a third bailout program for Greece didn’t spark any fear as it would be a distant event if true. For the medium-term traders, we should keep an eye on the developments in Portugal, Spain and Ireland. Portugal announced a 52 percent drop in its surplus, Spain is still shooting lower with its budget target and Ireland will call an EU fiscal compact vote in the Spring.

New Zealand Dollar Finds a Rudder in Risk Trends Against Upcoming GDP Release

While the sterling’s reaction to the budget announcement is a loaded fundamental setup, the ‘cleaner’ catalyst is New Zealand’s 4Q GDP release. In other word’s there aren’t many possible outcomes that can confuse the markets. It will generally be considered to be: in line; better or worse. The consensus forecast is for a 0.6 percent pickup through the period after the third quarter’s 0.8 percent expansion. The larger the ‘surprise’, the bigger the reaction; but a 0.2 percent point skew is likely the minimum for market impact. That said, with the market generally lacking for trend on a risk basis, we should set expectations low. Non-risk pairs (AUDNZD and AUDCAD) could actually outperform.

Australian Dollar Suffers its Biggest Drop Against Greenback in Three Months

Though risk trends were relatively little changed on the day (the benchmark S&P 500 was off only 0.3 percent), the Aussie dollar suffered its biggest loss against the greenback (1.2 percent) since December 12th. The Aussie dollar was uniformly down on the day – and off over one percent against the Swiss, euro and UK currencies in addition to the dollar. This was neither a small or isolated decline for the high-yield currency. However, without momentum developing for risk trends, it will not likely become a definable trend.

Japanese Yen Returns to its Bear Trend Tuesday, Carry Deviation Worrisome

The Japanese yen was a mixed back this past session despite the underperformance of carry and the modest pullback in traditional risky assets. That is a discouraging sign for those riding the yen’s tumble for all its worth. When a currency that is currency that was once extremely sensitive to such shifts shows marked hesitance, a correction could very well develop (especially true if risk aversion prompts carry unwind). The yen crosses have not abandoned their prevailing bull trends, but keep a wary eye on the benchmarks for sentiment.