Talking Points:- Dollar Range Sets Another Dangerous Low
- Euro: The Pressure Mounts for the ECB to Ease
- Australia Dollar Bulls Show Relief in Status Quo RBA
Dollar Range Sets Another Dangerous Low
Extreme volatility readings are easily spotted in all corners of the financial system. Equities in particular have been a big story as activity readings have bounced along multi-year lows recently. However, nowhere are trading conditions as remarkable as the currency market. The FX Volatility Index – a measure of expected movement a month forward – has collapsed to a seven-year low. Realized activity levels have plunged similar depths. Yet, the situation is even more incredible on an individual pairing basis.
ForEURUSD, the 20-day average true range– ameasure of actual price action – has collapsed to a record low since the Euro began trading. Another of the most liquid majors, USD/JPY has seen its one-month implied volatility reading hit a record low going back multiple decades. These readings have in turn contributed to the extraordinary circumstances for USDollar. Through Monday’s session, the Index produced a range of a mere 10 points. There are only 6 other instances in the benchmark’s price history where it has covered less than 15 pips in a trading session – and half of those are holidays. These are truly incredible market conditions.
Extremes are not meant to last – that is why they are considered as such. The question is: when do trading conditions attempt the return to ‘normal’ and what will be the circumstances surrounding its rebalance? Excessive use of leverage and a shallow poll of liquidity sow the ground work for a violent deleveraging under adverse conditions – translation: severe risk aversion. That level of speculative interest can revive the greenback’s little-appreciated safe haven status. Yet, the market has shown a resiliency to panic. As we wait for the spark that will ignite risk trends, the dollar’s current will likely be determined by rate expectations. The ISM’s service sector survey this past session helps offset last week’s disappointing 1Q GDP release and gives a nudge on the NFPs debate. Ahead, we have trade data and the Fed’s Stein speaking.
Euro: The Pressure Mounts for the ECB to Ease
The newswires are doing what they can to remind us that there is an ECB rate decision on Thursday. There is already tremendous speculation suggesting the central bank will make another easing move in the near future – though it never seems to be at the next central bank meeting. Recently we have seen ECB President Draghi make the connection between the exchange rate and weak inflation, politicians decry the burden of the high currency and softening of economic data. Monday, these themes were furthered. Attempting to strong-arm monetary policy officials, French Prime Minister Valls remarked that the euro was too high and required further central bank action to ease its strength. On the data front, a slight easing in Eurozone investor sentiment was not as significant as the downgraded growth and inflation forecasts in the EU’s Spring assessment. The latter downgrade from 1.0 to 0.8 percent is particularly important for the central bank’s decision later this week.
Australia Dollar Bulls Show Relief in Status Quo RBA
Concerns that the RBA will slide back into a dovish policy stance were curbed this morning after the central bank maintained policy and tone at its policy decision. Immediately following the suggestion that rates are likely to go through a period of stability and inflation was on track to meet the 2 to 3 percent target, the Australia dollar found a quiet bid. However, that move seemed to be a modest unwinding of dovish risk premia as the move quickly faded. Falling back into the market’s ‘status quo’, the Australian dollar is facing a global drop in yields that is pulling down the 10-year Aussie yield further below 3.90 percent.
British Pound Traders Should Keep Track of Data
A market holiday in London dampened the pound’s already-tepid volatility measures and did its part to disrupt the transmission of risk trends. Back online, sterling traders much keep track of event risk. This is a currency that is not particularly beholden to the traditional risk trends – which are anchoring price action in other pairs and asset classes that are running on that fuel. For the pound, rate forecasts are far more motivating. Already positioned with a hawkish outlook, we have a broad PMI survey and private inflation reading for April due.
New Zealand Dollar: Why Do So Few Expect Gains?
It seems there are is a strong belief that the New Zealand dollar will struggle for traction and NZDUSD will fail to overtake 0.8750 on a bid to new multi-decade highs. Adding to the central bank’s (RBNZ) passive remarks that it judges the exchange rate to be too high, the New Zealand Treasury noted a drop in inflation pressures recently. In the market, a Deloitte survey of CFOs showed only 14 percent expected the benchmark lending rate to exceed 3.50 percent in 12 months time while only 36 percent expected NZDUSD to be above 0.8500.
Chinese Yuan First Back-to-Back Gain in 4 Weeks
There is a bit of a difference between data and performance for the Chinese currency so far this week. USD/CNH (Dollar versus the offshore Renminbi) slipped 0.2 percent Monday and is down once again this morning. If we close in the red, this would be the first back-to-back drop for the pair in four weeks. On the data front, the data was mixed. Saturday’s service-sector PMI report for April from the government rose slightly to 54.8 (above 50 reflects growth). That said, the HSBC manufacturing report unexpected slipped in its final reading.
Emerging Markets Volume, Appeal Tumble
The MSCI Emerging Market ETF dropped 0.6 percent to start the week, but the real blow was to volume which was more than halved from Friday – and the lowest overall turnover excluding the year-end holiday season in years. On the FX side, more of the riskier currencies rose; but their gains were modest. Meanwhile, the Brazilian Real dropped 1 percent and South African rand fell 0.6 percent.
Gold Clears $1,305 as Bulls Scramble for Support
Spot gold advanced to start the week, and has closed above $1,305 for the first time since April 14. Yet, FX and other capital markets, the level of volume behind the move was particularly tepid. The Commitment of Traders report from last week showed speculative showed a second week of increase to net longs – to 85,227 contracts. To feed this bullish appetite, a dollar tumble or inflation fear surge would go far.
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