Dollar De Facto Winner in a Reemerging Currency War?
Value in the currency world is assessed on a relative basis. A simple improvement or decline in one unit’s fundamental backdrop does not necessarily secure a strong trend. Sometimes, a currency can find itself in a position where it is assessed to be the ‘best of the worst’. Could the dollar generate strength through this unflattering yet nevertheless supportive distinction? From the docket this past session, the data seemed to fall short of the influence required to tap into the greenback’s deeper fundamental veins. A sharp 14.5 percent drop in new home sales through March – the second largest drop in four years – was a substantial headline to growing fears of a stalled housing sector recovery. Markit’s manufacturing PMI survey for April similarly missed the mark and dimmed investors’ growth expectations modestly.
Yet, neither indicator nor their combined influence have materially offset the Fed’s policy bearings or raised the specter of an isolated return to recession. Treasury yields (particularly 2, 5 and 10-year) were little changed on the day. Where the dollar may find traction in this lackluster position is the steady descent into competitive monetary policy easing its major counterparts have takento. The ECB has taken to threatening its rate cuts whenever EUR/USD nears 1.4000. Both Australian and New Zealand authorities have maintained a campaign to talk their currency down. And, the BoJ has engaged a stimulus program to rival the Fed’s. If this is a currency war, the dollar is ‘losing’.
Euro Traders Likely to Pay More Attention to Draghi than Data
The newswires out of the Euro-area were certainly encouraging of the region’s health – and in turn the currency’s fundamental prospects. For data, the PMI surveys for business health in April offered a meaningful boost to growth forecasts. While France’s measures cooled more sharply than expected, the German and Eurozone figures posted meaningful gains to near-three-year highs. A 55-pip EUR/USD rally was the single currency’s reward. Later on, Portugal conducted a successful (high demand, low yield) auction of 10-year bonds – its first since its rescue program – though the market was less impressed by the ‘periphery’s’ ability to regain access to the market. Between both items, EUR/USD ended exactly 12 pips higher on the day. When the ECB makes threats whenever 1.4000 comes into view, it’s difficult to mount a rally.
British Pound Heading to Inevitable Break
What do you get when the average daily range on a currency pair is 70 pips and its tradable range is less than that (and shrinking)? An inevitable breakout. Pushing against a four-year high, GBP/USD has run out of room to maneuver without making a real decision on direction. Yet, traders know that a breakout does not necessarily translate into a trend. Looking for an impetus for a sterling drive – bullish or bearish – the docket’s CBI retail sales report today falls far short. Unless yield forecasts change materially, remain skeptical of near-term breaks.
New Zealand Dollar Sedate Despite RBNZ Rate Hike
Sporting a uniform advance against its major counterparts (between 0.2 percent on NZD/JPY and 0.4 percent for NZD/USD), we could ascertain through price action that the New Zealand currency found fundamental support this morning. Indeed the RBNZ met both market and economist expectations – projecting a 97 and 100 percent probability respectively – of a 25 bp rate hike to 3.00 percent. In this world of yield grab and central bank’s defaulting to talking their currencies down, why isn’t the kiwi making greater strides in a rally? Governor Graeme Wheeler deserves much of the praise/blame. Before he engaged in the current tightening cycle (now two hikes), he gave fair warning of his tightening bias. Markets gained into the first hike, taking away much of the shock value. And, while it is building carry, yield is still historically low.
Australian Dollar Stumbles as Nascent RBA Hike Hopes Fade
The 1Q CPI release proved a substantial market-mover for the Australian dollar. Strictly speaking, the 2.9 percent inflation reading was the highest in two years and at the top of the central bank’s tolerance band – raising the potential for a rate hike sometime in the not-so-distant future. Yet, that reading was still short of the hawkishness Aussie bulls had recently priced in. The question is, how far has it been deferred?
Chinese Yuan Slips Fourth Straight Versus Dollar, Down 12 of Last 15 Trading Days
The Chinese currency (Yuan and offshore Renminbi) has dropped for four consecutive trading days through Wednesday’s close. While the clip of decline isn’t exactly breakneck, the consistency continues to wear on ‘China carry trade’ interests. This past session’s Chinese manufacturing PMI figure reading a fourth day in contractionary territory adds to the picture, but a genuine ‘risk’ move would likely add momentum.
Emerging Markets Drop, Ukraine Impact Still Limited
Amongst mixed ‘risk sensitive’ asset classes this past session, the Emerging Market block was one of the worst performers through Wednesday’s session. Capital markets slid with the MSCI Emerging Market ETF dropping 0.7 percent on increased volume. The collective’s sovereign debt would also edge slightly lower with a Bloomberg Index notching its first downtick in six days. In the currency ranks, the Brazilian Real’s 0.7 percent rally versus the dollar was an anomaly. Most of the liquid EM currencies were lower on the day – though not under heavy selling. The Indonesian rupiah dropped 0.9 percent, Indian rupee 0.5 percent and Turkish lira 0.4 percent. Of particular note, the Korean Won was restrained despite a better-than-expected 1Q GDP release this morning. Also interesting, the Russian Ruble is holding steady despite reports of escalating tensions over Ukraine. Traders are curbing panicky responses to vague – though still troubling – event risk.
Gold Ends Six-Day Tumble, Technically
Spot gold closed out Wednesday with the metal’s first gains in seven straight trading days. However, before we call this a ‘reversal’; we need to appreciate the scope of the move. A meager 10 cent gain is the thinnest of gains and shouldn’t be considered a signal of motivations. Then again, this commodity has posted tepid trading conditions for some time – giving the impression of yet another market that will be driven to a breakout when traders are shaken out of their balanced position of indecision. Background conditions reflect the same questionable activity levels as other markets. Volume through derivatives (ETFs and futures) marked the second slowest day of trading this year. Though they may not spur a lasting trend; strong risk trends, a dollar run or shift in global stimulus forecasts are needed to rouse volatility.