Talking Points:
- Dollar Rallies as 10 Year Yield Tumbles
- British Pound Tumbles Versus Majors as Rate Outlook Slumps
- Euro: Does ECB’s Warning of Bubble Risk Extend to EZ Periphery Markets?
Dollar Rallies as 10-Year Yield Tumbles
The Dow Jones FXCM Dollar Indexsurged to a seven-week high this past session. Against the traditional risk backdrop, the stalled rally for the S&P 500 and broader equity markets helps, but doesn’t confer an impetus. If the focus was instead on interest rate expectations, the currency’s fundamental performance was equally discordant. In fact, the 10-year US Treasury yield collapsed 2.8 percent this past session – the biggest drop since March 13 at 2.436 percent the lowest level since last June. With neither a safe haven bid nor a competitive yield bearing, where was the greenback sourcing its strength. As the saying goes, ‘in the land of the blind, the one-eyed man is king’. While the dollar’s fundamental stats may have not materially improved, its counterparts have fared materially worse. Between a multi-week bear trend for EURUSD, a key technical break below 1.6750 for GBPUSD, and bearish thrust below 0.8500 for NZDUSD (the largest carry-based major); the dollar is gaining ground through its counterparts’ own abdication.
A ‘best of the worst’ performance is not one likely to last in a market that is frustratingly directionless while also seemingly so close to tipping a more systemic change in activity levels. From yields, we are not likely seeing a genuine delay in the time frame for the first rate hike – much less a break from Taper – but rather a bid for the paper. Volume on Treasury futures have surged around the contract roll, while foreign demand for a floating rate 2-year note (an inflation and rate measure) picked up. We may not receive clarification until next week’s NFPs. Meanwhile, the ‘risk’ element remains, with an FX crowd ready to jump to the dollar and yen should fear take the wheel.
British Pound Tumbles Versus Majors as Rate Outlook Slumps
Though the GBP/USD 0.6 percent, 99-pip decline was not a single-handed to return to more volatile trading conditions, it was nevertheless a remarkable move for the pound. For the benchmark pair, the drop cleared the technical floor of a bull trend that has guided the market higher for the past 11 months. Furthermore, it was a universal slump for the sterling versus most of its counterparts – the exception being the GBP/NZD. On the docket, the Debt Management Office sold £1.1 billion in 2052 index-linked bonds. In turn, the 2-year Gilt yield dropped 7.6 percent to 0.644 and the 1-year-2-year forward swap dropped 3.45 percent. The high-flying rate expectations for the BoE may be coming under pressure, but there hasn’t been anything tangible to spark concern of a delayed first hike. And, there is little on the immediate docket.
Euro: Does ECB’s Warning of Bubble Risk Extend to EZ Periphery Markets?
Fundamental euro traders were likely watching the Germany employment statistics this past session. And, the unexpected 24,000-net increase in the jobless ranks was certainly news worthy. Yet, it didn’t stir the EUR/USD to the day’s tumble. That falls to a combination of the unfavorable monetary policy expectations ahead for the ECB, further comments from central bankers insinuating a move is unavoidable on June 5 and an ECB report showing bank lending fell for a third month in April. Particularly interesting was a biannual report from the bank which suggested there may be a financial bubble that has developed out of a chase for yields. Does that apply to EZ periphery bonds?
New Zealand Dollar Worst Performer on the Day as Banks Expect Dispersed Hikes
Once again, the New Zealand dollar was the worst performer amongst the major. This retreat is gaining serious ground with NZD/USD dropping below 0.8500 and the AUD/NZD making a move to push through the 1.0900 resistance that has capped the pair through 2014. The sharp decline in the ANZ’s business sentiment survey certainly adds a bearish weight on the market, but the scope of this move certainly finds its origination in diminished rate expectations. Given the RBNZ is actively engaged in a rate tightening cycle, that may seem a contradiction in terms. However, the market moved to price hikes well in advance – and now the expected pace of consecutive hikes is coming serious doubt.
Japanese Yen: Will BoJ Consider Retail Sales Plunge, Upcoming CPI?
The Japanese economy received a black mark this morning when retail sales figures for April collapsed more aggressively than expected. However, the market was prepared for an adjustment given that was the timing of the nation’s tax hike. Should we expect similar responses from the upcoming round of critical data? Household spending for April is certainly an ‘at-risk’ measure, but the jobless rate, industrial production and CPI figures fall further outside its influence. Would an economic slump and moderation in price pressures encourage a QE upgrade?
Emerging Market Currency Mixed, Sovereign Bond Appetite Soars
Just as the climb in developed world capital market indexes stalled this past session, so too did the Emerging Market’s stumble. The MSCI Emerging Market ETF rose 0.6 percent – hefty enough to curb bearish interests but restrained enough to prevent a meaningful break to new highs. On the FX front, the field was mixed. Gains were marked by the Brazilian Real, Indian Rupee and Turkish Lira; while the Mexican Peso and Russian Rubble slipped. Of particular note amongst the different asset classes, a EM sovereign debt index hit a record high.
Gold Tumble Continues but at a More Controlled Pace
Volatility didn’t snuff out gold’s bearish move. On the back of Tuesday’s hefty 2.2 percent tumble, the precious metal followed up with another 0.5 percent slide this past session. Volume behind the move in the ETF and futures market remains elevated. Meanwhile, the CBOE’s Gold Volatility Index is still up over 15 percent from its 12-month low set earlier this month. This is an impressive move, but just like risk or the dollar; continuation requires more than just a technical drive. A dollar rally could feed bears while a risk aversion wave could roust the bulls.