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Euro Area Growth Stalls, Trouble Ahead If Yields Turn

Published 08/15/2014, 06:11 AM
Updated 07/09/2023, 06:31 AM

Talking Points:

  • Dollar Can Leverage Yield Forecast If CPI Picks Up
  • Euro Area Growth Stalls, Trouble Ahead if Yields Turn
  • British Pound: Traders Now Focused on Inflation Figures

Dollar Can Leverage Yield Forecast If CPI Picks Up

US rate expectations measured in Treasury yields and appetite for safe havens have significantly declined this week. And yet, the Dow Jones FXCM Dollar Index (ticker = USDollar) has held up rather well. That is perhaps the best the currency can hope for in this unfavorable mix. For motivation moving forward, the recent collapse in volatility measures from equities to FX will likely impede any ambitious dollar runs – though we should never write off the unpredictable nature of ‘fear’. More tangible in its influence on the greenback will be rate forecasts. Treasury yields and Fed Fund futures show the market is still discounting the central bank’s and economists’ forecast. That fundamental disparity will be tested next week particularly with the release of the consumer inflation (CPI) report.

Euro Area Growth Stalls, Trouble Ahead if Yields Turn

The Eurozone’s recovery from its financial and sovereign debt crisis just a few years ago has stalled. Second quarter GDP figures released this past session show that ‘core’ economies have succumbed to global headwinds and the lingering struggles of the ‘periphery’. So, while Spain, Greece and Portugal may have seen a further improvement in their position; the outlook for the region and Euro don’t exactly look encouraging. Germany’s economy contracted in 2Q, France flat-lined and Italy fell back into recession. Those three countries alone make up for the bulk of the broader region’s economic performance. This is a serious contrast and concern against the record low sovereign yields and the massive capital inflows that have been experienced to this point. Should volatility pick up and draw a more critical eye, the Euro will be at risk.

British Pound: Traders Now Focused on Inflation Figures

UK yields and swaps continue to deflate – though at a far less aggressive clip that what was suffered Wednesday. The persistency of rates and the Pound in their respective retreats shows that speculators are genuinely surprised by the Bank of England’s less hawkish stance in their Quarterly Inflation Report and that positioning had overstepped the fundamental backdrop. Moving forward, this suggests the market will be far more sensitive to important data releases – and that the reactions will be far more balanced. Previously, data that supported the hawkish outlook had a leveraged impact on price action while disappointing updates generated limited impact. This sets up key event risk next week in the form of July inflation figures. The consumer, producer, retailer and housing statistics are all due Tuesday. And forecasts are dovish…

Yen and Volatility Retreat in Tandem, Do Both Have a Natural Low?

The 20-day (1 trading month) correlation between USD/JPY and the VIX Volatility Index has maintained a negative relationship for 12 months. In other words, when volatility – a measure of fear – retreats; the yen crosses advance. That is what we would expect from a carry trade stalwart that has been further inflated by the efforts of the Bank of Japan. Yet, even though the Japanese GDP slumped in the 2Q data this week, it is unlikely that stimulus will take over to drive the USD/JPY and counterparts to further heights. That means, the responsibility falls to speculative appetites. However, there is a material skew in the outlook for risk trends. Further driving carry interests higher may meet the same kind of limitations that volatility readings are facing with their own relative lows. Is this a meander until USD/JPY breaks below 100?

Canadian Dollar: What Does the Re-Release of Jobs Data Mean for Traders?

We rarely see indicators from the majors necessitate a re-release. Yet, that is what is in store for the Canadian dollar in the upcoming session. According to Statistics Canada, errors were found in the July jobs figures reported last Friday. Originally, a net 200 jobs were reportedly added to the economy – well below the consensus – which contributed to a nearly 80-pip USD/CAD rally. The pair has since retraced that entire move and more. Therefore, will the market’s reaction be a ‘fresh’ one – as if the data was never released? Or is there some remnant speculative interest still priced in? That remains to be seen. However, those trading Canadian dollar pairs should be on their guard for volatility. A lasting impact from this move, however is unlikely as it carries limited promise to change the dovish view of the BoC.

Emerging Markets: Korea and Chile Central Banks Cut Rates

Are Emerging Market central bankers seeing a downturn in economic ahead? Over the past trading day we have seen two policy groups cut their benchmark lending rate. The Bank of Korea lowered its rate 25 bps for the first time in 15 months – a departure from its hawkish tone – to 2.25 percent. Later in the day, Chile cut its own key rate also by 25 bps to 3.50 percent. This is the sixth time they have cut in the span of less than a year. Data due early next week is expected to show a further cooling in the country’s pace of growth to a multi-year low. While this is not a systemic dovish turn for the broader Emerging Markets, hawkish regimes have notably leveled off. The pinch is being felt as global activity levels cool and stimulus programs in advanced economies begin to wind down.

Gold Volatility Further Collapses, Fear of Breakout Evaporating

The Average True Range (ATR) says it all. Gold’s daily swings are rapidly diminishing. Complacency is setting back in. Not only do we see this manifesting itself in a price-based range between $1,320 and $1,305, but we are also seeing it play out in volatility and volume figures. In ETF trading, the 3.35 million share turnover (well below the 5.71 million monthly average) sees a steady trend of fading trading interest. Perhaps more dramatic though is the rapid decline in the CBOE’s Gold Volatility Index which has dropped 12.5 percent (1.8 vols) in the span of two days. Gold is more difficult to motivate than many of the other financial markets that are struggling with activity. Definitive changes in global interest rate and inflation expectations or a universal shift in currency’s use is difficult to muster.

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