Talking Points:
- USD Still Dives Through Stock Market Collapse
- EUR/USD: Does Weak Inflation or EURUSD at 1.4000 Move the ECB?
- Japanese USD/JPY Crosses Slip on Risk but Shy from Equities’ Momentum
Dollar Still Dives Through Stock Market Collapse
If this past session was running on a ‘risk aversion’ theme, someone forgot to tell the dollar to don its safe haven cloak. The S&P 500 led a global equity selloff this past session with a 2.1 percent tumble – its steepest in two-months. It will take a substantial level of ‘fear’ to revive the greenback’s liquidity appeal; but with the US index pressuring a prominent level of support to its most recent bull run to record highs, there was perhaps the opportunity to hit that extreme. Yet, the performance between currency and index couldn’t have been more different. Compared to the severe and negative move in stocks, the dollar was controlled and heading lower. A better driver for the currency seems to be the fifth straight drop in mid-term Treasury yields (easing rate forecasts). Bulls need either a more symbolic risk drop or strong CPI data next week.
Euro: Does Weak Inflation or EURUSD at 1.4000 Move the ECB?
EUR/USD advanced Thursday and is now working on its first five-day run since mid-December. The quick reversal from this benchmark currency pair has driven us back up to 1.3900 and the put us in the same vicinity that provoked ECB President Draghi into making the connection between exchange rates and monetary policy last month. On March 13 – on a day when the pair pressed a multi-year high just 35 pips short of 1.4000 – the central banker commented that a high Euro contributes to weak inflation. Yet, that warning didn’t necessarily send the currency reeling – that was accomplished later by the FOMC when they announced their policy assessment. The market looks intent once again to press European authorities on the point. Capital is flowing into the region seeking higher rates of return and diversification. If the inflation update next week or another Draghi effort aren’t realized, EURUSD may slowly work its way to 1.4000 and a nest of entry/stop orders.
Japanese Yen Crosses Slip on Risk but Shy from Equities’ Momentum
The fire continued for the yen crosses this past session with the pairs falling another 0.1 to 1.0 percent (CHF/JPY to CAD/JPY) this past session. As broad as this move was, though, it is worth noting that it was measurable less severe than the move on Tuesday. That is something of a surprise for those watching risk trends, as these low-yielding but expensive carry pairs maintain an especially strong correlation to benchmark sentiment measures. This morning, the Nikkei 225 is down another 2.0 percent – bringing the week’s plunge to an impressive 7 percent while the index sets a six-month low. In hesitation from USDJPY, EUR/JPY and GBP/JPY; we seem the same reluctance to take the next big step over the cliff that stocks have shown. The difference is that the yen pairs were closer to their break point.
British Pound Unfazed by BoE Hold, Inflation and Jobs Data Next Week
Once again the Bank of England’s (BoE) policy gathering would pace with little fanfare from the FX trading ranks. A hold by the central bank means that there is no statement to be released or nuance from which we can extract expectations for interest rate moves down the line. Having stalled at 1.6800, GBP/USD needs another push from rate hawks to upgrade its advance to the self-propagating momentum. Next week, we will have a far better chance to spark a chance in rate speculation with the March round of inflation figures.
New Zealand Dollar Loses Ground Through Risk Slide, Foreign Demand Update
Why is the NZD/USD considered one of the ‘major’ currencies of the world? A top credit rating and high yield mark it as a favorite investment currency for global financiers. An appetite for carry trade is therefore particularly important for keeping capital flowing into New Zealand and thereby the kiwi buoyant. With the RBNZ leading the shift to a tightening regime, the central bank is acting to maintain the currency’s position in the financial system; but appetite for that yield is something authorities have less control over. Despite the hike last month, data shows foreign holdings of New Zealand debt dropped to 62.8 percent – the lowest level since November 2012.
Chinese Yuan Ready for Volatility Next Week with 1Q GDP Release
The Chinese currency (CNH or offshore Renminbi) dropped 0.3 percent against the dollar this past session – its biggest stumble since March 10. This move is even more interesting considering authorities actually lowered the USD/CNY reference rate from the previous day. Having returned to the 12-month highest set this past month, there is evidence that the market is particularly cautious about returning to the ‘China carry trade’ as exchange manipulation and liquidity concerns may impede investors ability to unwind should the pullback in speculative markets we’ve seen recently grow more intense. Looking ahead to next week, the market will gauge economic health and financial stability in the world’s second largest economy with the release of the 1Q GDP data alongside other high-level metrics.
Emerging Market Currencies Mixed Despite Equity Plunge
If this past session was a strong ‘risk off’ day, then shouldn’t one of the most sensitive asset classes in the financial markets – emerging markets – suffer equally to equities? While the MSCI Emerging Market ETF fell 1.1 percent through the session, the currency segment for this grouping was generally mixed. The heavy-hitting and more liquid currencies in this group (Brazilian Real, South African Rand, Mexican Peso and Indonesian Rupiah) fell against the safe haven dollar on the day between 0.9 and 0.6 percent. Yet, the Russian Ruble, Taiwanese Dollar and Chilean Peso were a few of the higher risk and less-traded units that saw significant gain. So long as Emerging Markets are not aligning to equities, yields and yen crosses; the reading on ‘risk trends’ is weak.
Gold Climbs Third Straight Day as Dollar and Sentiment Retreat
With the correct combination of fundamental influence – as questionable as they may be for follow through – spot gold managed its first three-day advance since the market topped back on May 14. Absent though in this comparison was the momentum. Thursday’s performance was a 0.5 percent gain to $1,319. Yet, once again, when we price the metal in euros, pounds or Australian dollars; the gains evaporated. The advance gold has made this week has been largely pricing derived – weakness in the unit of currency that is used to value the commodity. While there is certainly validity to gold’s strength in terms of a general selloff in equities and the weakening of the world’s most liquid currency, need for this alternative asset is still not hitting escape velocity. Looking to derivative volume, turnover eased in ETF as well as futures trading and is still below its two-week average.