Talking Points:- Dollar Uninspired by Increasingly Hawkish Fed Rhetoric
- British Pound Responds to a BoE Tightening…Sort Of
- Euro Rates Hit a 12-Month Low, Bond Yields a Record Low
Dollar Uninspired by Increasingly Hawkish Fed Rhetoric
Though the pace of its retreat cooled this past session, the dollar nevertheless extended its decline. The Dow Jones FXCM Dollar Index (ticker = USDollar) edged 8 points lower to technically close at its lowest level in seven weeks. However, like most breaks occurring in these market conditions – regardless of asset class and direction – there was a material lack of conviction. We can see the same hesitation to turn drift into trend amongst the greenback’s pairings. Despite a burst of volatility, EUR/USD has kept to its range. Meanwhile, GBP/USD, AUD/USD and USD/JPY all seem to be unfazed by their proximity to major technical levels. Under normal conditions, this would likely catalyze to a breakout or reversal in short order. Yet, we know current conditions are far from ‘normal’.
Putting aside the prominent fundamental themes and the enticing technical patterns, the overriding trait of the financial markets right now is activity. Volatility measures have been trending down for months in a systemic slump for fear and speculative opportunity. This is only exacerbated by the seasonal ‘summer doldrums’ which will be particularly draining next week with a Friday Independence Day holiday in the US encouraging liquidity in the financial center to drain well in advance of the actual market closure. It is difficult to normalize even extreme inactivity when there isn’t a market to fuel swings.
Market conditions aside, the dollar’s fundamental appeal improved materially this past session – at least on the relative monetary policy front. The Fed’s first rate hike will not come when the unemployment rate hits a certain level but when inflation pressures the central bank to remove accommodation. The central bank’s preferred inflation reading – the Personal Consumption Expenditures Deflator or PCE – showed a pickup in pace for the headline reading to 1.8 percent with a 1.5 percent uptick in the core. These are still both below the central bank’s medium-term target of 2 percent, but St Louis Fed President James Bullard remarked that we would likely be above that level next year. In fact, he believed circumstances would necessitate a hike by 1Q 2015. Richmond Fed President Jeffrey Lacker proffered a hawkish view of his own – though not quite as aggressive. Next week, we will see the same high profile rate speculation with NFPs vs tepid market conditions with July 4th.
British Pound Responds to a BoE Tightening…Sort Of
The Bank of England took steps to curb inflation…in the housing market. Normally, a move to halt price growth would be an interest rate hike; but such a blunt instrument would carry too much collateral damage for the central bank to implement now. While that first benchmark rate increase is on the horizon, concern over the state of the UK housing sector (a bubble that will go unlabeled by officials) demanded a move now. BoE Governor Mark Carney announced a first step to limit loan-to-income ratios and to refuse loans that fail a stress test (a 3 percentage point rate increase). The stress test insinuates hawkish intentions; but this move also obviates a first hike to answer housing fears…
Euro Rates Hit a 12-Month Low, Bond Yields a Record Low
The 3-month Euribor rate – a market standard – has dropped to a 12-month low as the ECB’s recent accommodation shift continues to lower the baseline for returns in the Eurozone. Yet, just because the broader rate of return is dropping doesn’t mean the speculative options have suddenly disappeared in the region. As two-year Spanish yields slip to fresh record lows, we see the appetite for risky exposure in the ‘periphery’ remains. This is a crowded trade however and fully dependent on persistent risk appetite. Confidence will break eventually.
Yen Crosses: What Can Move This Market?
Japan released a flood of data this morning that reflects both on economic activity and monetary policy. The country’s unemployment rate dropped to its lowest level in nearly 17 years (3.5 percent), but the tax hike in April had also led to the second biggest drop in household spending on record (8 percent). From the National CPI figures, we find core inflation above the BoJ’s target at 2.2 percent and headline running hot at 3.7 percent. None of this moved the yen crosses. So what can motivate the Japanese currency? Risk trends.
Australian Dollar Struggling for Progress, RBA Ahead
The Australian 10-year government bond yield has collapsed to a 12-month low and the Australian dollar has struggled to make bullish progress. This lack of performance comes despite a prominent rise in equities; but for a carry trade currency to ride the yield current, it needs yield. A rate hike isn’t necessary for bulls, but an outlook for tightening is in this low rate environment. Next week the RBA may give us that time frame.
Emerging Market Currency Split Reflects Volatility Conditions
With volatility in retreat, we are witnessing not just a drop in fear. We are also seeing a curb on ‘risk appetite’. The lack of commitment one way or the other has led the MSCI Emerging Market Index (MSCI Emerging Markets) to congestion and the lowest volume since the Christmas holiday. In the currency rankings, momentum was absent; but a few – the Brazilian Real and Russian Ruble – managed to set new multi-month highs.
Gold: The Biggest Rally in 9 Months, Then a Return to Extreme Quiet
Just a week ago, Gold put in for its biggest daily rally since September on strong volume – a move that cleared a general bear trend months in the making. And since that surge, the precious metal has gone virtually no where. Of interest, futures open interest has shown a consistent climb over the past weeks. The past few times this has happened, we have seen the market put in tops – likely a reflection of short-tem spec interest.