Dollar Slides as Volatility Shrinks, Equities Rise and Yields Struggle
The Dow Jones FXCM Dollar Index attempted to recover from early losses this past session, but its effort wouldn’t prevent the currency from closing at six-week lows. There are a number of damning reasons for the world’s most liquid and interrogated currency to be caught in a bearish current. It is therefore somewhat surprising that its slide has not been more intense. When an asset does not retreat or suffers only modestly in the face of negative fundamental pressure, it is often a sign of an inherent strength. However, actual appreciation requires favorable conditions; and the greenback’s most prominent drivers are still working against it.
Without doubt, the most charged theme for the dollar is the speculative appetite that drives investors to higher returns or safer harbors. This theme certainly turned the screws on the benchmark this past session. From the capital market benchmarks, the S&P 500 and MSCI World Index each forged record highs. Closer to home, FX-based volatility readings – considered by many a gauge of fear – slid to record lows. Historically, the correlation between the currency and expected activity measure is strongly positive. It is therefore noteworthy that the USDollar is still above 10,400 – the past 12-months’ support – while one-month implied (expected) volatility for the FX market has collapsed to 4.87 percent. For reference, the three year average is 9.17 percent and the stock-based VIX is currently 10.6 percent.
The other point of contest for FX performance is the interest rate outlook. On that front, short-term Treasury yields and swaps may have eased after the FOMC decision, but they have quickly stabilized this past session. In fact, the two-year Treasury yield is close to a 9-month high and the 1year-2-year swap rate is in striking distance of a three-year high. US rate forecasts still look more than competitive.
British Pound Breaks Critical 1.7000 Level as Rate Hopes Bloom
Whether they mean to support the British Pound or not, the Bank of England (BoE) is doing more than its fair share to lift the currency. On the back of Governor Mark Carney’s suggestion that hikes could come earlier than the market anticipates and the MPC Minute’s surprise that there wasn’t a greater discount for a 2014 hike, BoE member McCafferty added his own musings that tightening shouldn’t be held back too long. In the grander scheme, these comments don’t necessarily add much to the market outlook, but they reinforce the speculative weight of the GBP/USD’s 1.7000 break Thursday morning. Currently retail traders are the most short on the pair in six weeks (5.5 shorts per each long).
Swiss Franc: SNB Reaffirms 1.2000 Commitment, Offers Nothing More
As expected, the Swiss National Bank (SNB) took a wait-and-see approach with its monetary policy. Keeping its benchmark rate at zero and reiterating its commitment to keep the 1.2000-floor on EUR/CHF in place, its position is certainly accommodative. However, that may not be enough to accomplish what the central bank is most concerned about – deflating the value of its currency. The problem does not necessarily reside in local economic factors or the SNB’s actions. Instead, it is the ECB’s effort to escalate its own stimulus effort that is putting downward pressure on the euro and the key Swiss exchange rate. Outright eurozone QE could drive the pair back to 1.2000 and anchor it there.
Euro Medium-Term Bearings Still Bearish, Yields May Shock it to Life
The euro is holding up well considering the baseline three-month Euribor rate has collapsed over the past few weeks. This benchmark rate reflects the european Central Bank’s new stimulus tack which will swell its balance sheet and erase one of the pillars of the shared currency’s two year rally. While the euro may not tumble as quickly as market rates, its gravity will look to pull it down through the medium-term. Meanwhile, the specter of a souring of global sentiment hangs heavy in the air. Any flight from periphery EZ bonds could prove painful.
Canadian Dollar: Is the BoC Attempting to Join in the Silent Currency War?
Through the final trading session this week, Canadian calendar events are top billing. April retail sales and May consumer inflation figures (CPI) will give a good view of fundamental health factoring into monetary policy. It is worth nothing that where the dollar has dropped in the wake of the supposed dovish tone of the FOMC decision, the Canadian 10-year government bond yield is at a 36 bps discount to its US counterpart – close to the biggest gap in 5-years. The BoC has maintained a notably dovish course over the past months, but they may need to do more.
Emerging Markets Mixed Showing a Limitation to Yield Reach?
There is a reach for yield amongst global investors that are looking to take advantage of incredibly low volatility conditions and compensate for extremely low rates of return. Yet, perhaps there is a limit as to how far these traders are willing to go. The iShares MSCI Emerging Markets (ARCA:EEM) ETF has trailed the S&P 500 for some time, and this past session is no different. While the latter hit a record the former meandered.
Gold Posts Its Biggest Rally in 9 Months in an Explosive Break from Bear Trend
Gold surged nearly $43 or 3.3 percent this past session to close at $1,320. This was the biggest single-day rally for the commodity in nine-months and was a prominent break from a three-month bear trend. Yet, that technical accomplishment may have more to do with the remarkable climb than a deeper fundamental current – and that could spell trouble for those looking for a lasting bull trend. On heavy futures and ETF volume, a break of this magnitude dove into a layer of entry and exit orders that had accumulated in the quiet market conditions. Meanwhile, none of the commodity’s anti-dollar, anti-inflation or anti-risk themes seemed to find a foot hold.