Talking Points:
- Dollar Staves Off Another Reversal Risk
- Euro Focus Turning from QE Back to Greece
- British Pound Stumbles After Inflation Stalls for the First Time
Dollar Staves Off Another Reversal Risk
The Dollar took another stab at turning its eight-month bull trend this past session. However, this time around, there wasn’t a FOMC rate decision to focus the move. With the US Dollar leaning heavily on the floor of its advancing channel (translating to 1.1000 for EUR/USD and 1.5000 for GBP/USD), the bears lost conviction and control. We know that turning a speculative darling that has worked well for the buy-and-hold FX crowd will be difficult to muster – even if it has moved excessively and in such a short amount of time. And, the February inflation report simply wouldn’t provide the necessary impetus to substantiate such a tumble.
On the back of last week’s FOMC meeting, the market is treating its interest rate expectations as a day-to-day reevaluation. Each significant indicator or remark that clarifies the timing of the first rate hike and the pace thereafter can carry more weight in this sensitive market. That said, the consumer inflation figures from this past session didn’t deviate far enough from establish consensus to further the dovish view the market took last week after the Fed downgraded its growth and interest rate forecasts. The headline CPI figure posted no change on an annual basis (0.0 percent) – a slight and unexpected uptick from January’s pace. Meanwhile, the core reading for the same tenor met expectations of a rise to a 1.7 percent clip. If volatile commodity prices – which have leveled out recently – were to start rising again, it is likely that price pressures could return to and overtake the Fed’s target (2.0 percent) in the medium-term (two years out).
As we monitor the Fed mandate that is still running afoul of its objective, central bankers seem to be sticking to their effort to prepare the economy and financial system for the inevitable normalization. San Francisco Fed President Williams this past session remarked that the strong dollar has weighed on his growth forecast, but that it would be appropriate to discuss hikes by mid-year. St. Louis Fed President James Bullard was more direct when he said the zero interest rate was no longer appropriate and that he would prefer to see market and Fed forecasts more aligned – to avoid destructive adjustments. Moving forward, we should watch for comments on this disparity and market ‘bubbles’.
Euro Focus Turning from QE Back to Greece
When we compare the pace of the Euro’s depreciation before and after the introduction of its QE program, it looks a lot like the Yen’s performance around the adoption of its own QQE program on April 4,2013 – a long decline for the currency in anticipation of its activation and relatively modest follow through after the fact. This reads like the consummate ‘buy the rumor, sell the news’ scenario, except we sell the currency on QE and level off rather than reverse. A growing balance sheet will keep the Euro under pressure, but to see it make that drive to parity, a new spark is likely needed. Greece may be a more imminent threat than many appreciate as its banking system liquidity dries up.
British Pound Stumbles After Inflation Stalls for the First Time
The Sterling was down across its major pairings Tuesday in the wake of a drop in the United Kingdom’s February CPI release. The headline reading stalled – 0.0 percent growth – for the first time in the current series’ history. Given the Pound’s aggressive tumble these past months on the back of downgraded interest rate forecasts, the banner price indicator reinforces the fundamental view already in place. However, like the US reading, core UK inflation – though a six year low – is still holding at 1.2 percent. The market has likely overshot BoE rate forecasts.
Australian Dollar: RBA Comments on QE-Derived Carry Risks
The RBA’s Financial Stability Report this morning offered a unique pointed assessment of the risks that come from a world of QE – whether they intended to or not. In the review, the central bank stated that a world awash in accommodative monetary policy was fueling access to cheap funds and a subsequent appetite for return on that capital. A side effect, they believe is Australian real estate (especially commercial). They warned that the market – domestic and foreign speculative alike – were exposing themselves to large repricing.
Chinese Yuan Rally Stalls after PMI Data Furthers Economic Slowdown Fears
After an aggressive, five-day rally; the Chinese Renminbi has stalled. CNY/USD posted a modest advance this past session without committing to a true reversal. Fundamentally, the unexpectedly sharp drop in the HSBC (LONDON:HSBA)’s Chinese manufacturing PMI reading for March to negative territory (anything below 50.0 reflects contraction in the sector) is a problem for the bread-and-butter of Chinese growth for the past two decades. Yet, big swings in the currency will likely be decided by PBoC policy. There is growing speculation of Chinese QE and possibly a band widening.
Emerging Markets Rally Cools As IMF and Moody’s Warn
The MSCI Emerging Markets ETF has risen six of the last seven trading days and most EM currencies are up against the US Dollar over the past week (the Ruble is up 7.7 percent and the South African Rand 5.1 percent). Yet, traders should rein in the optimism. Both the IMF and Moody’s have issued warnings that this segments connections to the US and its policies could set it up for a major capital flow reversal.
Gold Completes First Five-Day Rally in 13 Months
Through Tuesday’s close, gold was up another 0.3 percent to round out its first five-day rally since February 14. This steady climb from the most recent swing low – a four month trough – comes on the back of an indecisive US Dollar (its primary pricing agent) and the rise of QE outside of the US. If everything remains status quo, this rebound can continue, slowly. But, if the Greenback catches traction, it will fall apart.