Dollar Traders Look For Risk Trend Surge With 1Q GDP

The dollar retreated this past session asbenchmarks for risk-sensitive capital markets reflected buoyancy behind yielding chasing and the struggles of the currency’s primary counterparts seemed to temper. This is a passive shift in market sentiment, however, easily shattered by an active fundamental catalyst. It so happens that we will be presented with a well-suited catalyst for speculative appetites as well as direct dollar asset interest in the upcoming New York session.

In an already dense economic docket for the majors this past week, the first read of the United States’ gross domestic product (Advanced 1Q GDP) is arguably the furthest reaching release. A temperature gauge for the world’s largest economy, the connections to market-wide sentiment are clear. If the US economy falls below investors’ expectations, the largest consumer nation in the world will sabotage the goals of so many trade partners whose express agenda it is to ‘export their way to growth’. And so it is that the world’s largest economy can direct the tides of sentiment not just American investors but those around the world as well. Offering a look into the unpredictable nature of risk trends, this past session fund tracker Lipper reported that $7.8 billion was withdrawn from US ETFs - the biggest weekly outflow since July of last year – in a sign that the high market levels are making investors anxious. That disconnect is reflected in many avenues in the market. Open interest in popular speculative derivatives (big contract S&P 500 futures) are at 15-year lows, the overall rate of return on global markets hovers off generational lows and unemployment levels are still unbearably high.

All the elements for a serious unwind of speculative exposure are there. Yet, there is one essential aspect of the capital markets that keeps traders in the pool and offers a bullish contribution of its own: central bank support (also referred to as stimulus). If a deep-pocketed Fed will maintain its bid, many risks will remain subdued and there is a trade opportunity to frontrun. This is another aspect to remember for the US GDP report. Recently, the media has presented a debate between whether the Fed will taper its QE3 program before year end or if it will actually boost its support. If the economy accelerates to 3.0 percent as expected, would the central bank favor an early trim to the support?

Japanese Yen: BoJ Made its Move Last Decision, Yen’s Turn?
Back on April 4, the Bank of Japan – led by new Governor Kuroda – announced a shift forward in its open ended stimulus regime…as expected. The market had priced in an ‘escalation’ of stimulus by the central bank well before the group actually met and decided a ¥7 trillion yen per month program should be enacted immediately. With the upgraded effort to devalue the nation’s currency, the saw USDJPY and other pairs continue their march higher; but the drive cooled more quickly than many had suspected. With a central bank pursuing an unprecedented (in terms of scale to GDP) stimulus program and risk trends still stable, we would expect a consistent run. Yet the 100-level curtailed appetite. Unless the BoJ further upgrades – of stokes expectations of future upgrades – their efforts they will not be furthering the drive beyond their current commitments. That leaves the responsibility for the next move squarely on speculators. Regardless a breakout is almost certain.

Euro: Economists and Media Expect ECB Rate Cut, Not the Market
A new theme is developing in the fundamental corners of the FX market. Discussion and speculation of an impending European Central Bank (ECB) rate cut has captured the imagination of economist and journalist. Yet, it is clear that the market is not yet on the same page. Looking at Bloomberg’s consensus, 27 economists now expect a 25bp cut in the benchmark rate to 0.50 percent versus 18 that are forecasting no change. That is a considerable change in the stakes. The financial media seems to be on the same page with countless stories that have expounded the reasons why a cut would be justified. That said, we can see that the EURUSD is not taking heed as it refuses to give in to momentum below 1.3000. Similarly, swaps show no pricing a cut next week. This will shape the dynamic of whether it is a market moving event.

British Pound Rallies after Strong UK GDP Thwarts Triple Dip Recession
The sterling forged a breakout from congestion as expected this past session with the help of heavy market-moving event risk: the UK’s 1Q GDP reading. Given the abnormal inactivity on pairs like GBP/USD, a sharp reaction to the data with meaningful short-term follow through was inevitable. However, the consistency behind the move beyond the normal 8 hour window of data absorption depends on how the data influenced the deeper market themes. The 0.3 percent growth reported was a best case scenario for medium-term trend generation. Avoiding a ‘triple dip’ recession, the sterling was given additional support behind its unwinding of excessive BoE stimulus expectations.

Australian Turns Higher with Solid Risk Trends, Robust Bond Auction
While the Australia dollar failed to gain traction on other fundamentally distracted pairings (GBP/AUD, AUD/JPY), the market favorite AUD/USD reflected some fundamental improvement for the currency. We can point to rising US and Asian equities as a justification for the carry advance, but this is likely moreso a recovery from depressed levels as a 10-year bond auction shows hearty demand on the higher level.

New Zealand Dollar Doesn’t Extend Rally with Trade Data, Overbought?
Since the Reserve Bank of New Zealand delivered its tepid assessment of conditions and policy moving forward, the New Zealand dollar has exuded remarkable strength. Yet, we are starting to hit significant levels amongst its crosses. NZD/USD, GBP/NZD and NZD/CHF are at levels that require serious commitment to drive further. If a two-year high, NZ$718 million trade balance can’t upgrade the move…