Talking Points:
- Dollar May Find Real Traction if EURUSD Collapses
- Euro Traders Look for Same Volume, Volatility as Pound on Eurozone GDP
- British Pound Suffers Biggest Drop in 7 Months, Heaviest Volume in a Year
Dollar May Find Real Traction if EURUSD Collapses
A look at the chart shows us the Dow Jones FXCM Dollar Index (ticker = USDollar) made progress this past session. A push higher has led the greenback benchmark to its highest level in 5 months; and to some eager bulls, it looks like a technical break. However, between the uneven bid for the currency and the lack of a fundamental motivation accompanying this performance, a healthy amount of skepticism is warranted. While the USDollar may have marked progress, its advance was modest – around half the average daily range of the past trading month. Furthermore, a single dollar pairing was responsible for the bulk of this move: GBPUSD. The ‘Cable’ dropped 0.7 percent Wednesday under heavy trading conditions. This move was the responsibility of the sterling, not the dollar. That becomes immediately evident when we see the lack of progress for other majors and the lost ground booked against the traditional carry currencies – Aussie, Kiwi and Loonie dollars.
For the dollar’s own performance, there has been little to facilitate a change in its own appeal. The docket this past session offered up July retail sales that missed expectations on both headline (0.0 versus 0.2 percent consensus) and core (0.1 versus 0.4 percent consensus) readings. Meanwhile, New York Fed President William Dudley remarked that serious flaws in the financial system had developed in the recent years. Neither data nor warning though would spur a serious aversion to risky assets. The market’s confidence in timely Fed hikes though did further retreat however with both 2-year Treasury yields and Fed Fund futures lowering their respective projections. Ahead, import inflation and Bloomberg’s economic survey are worth noting, but are unlikely to spur a heavy move. Rather than awaiting a capital market surge though, the dollar may instead find its motivation elsewhere. A big EURUSD move on local GDP figures can amplify interest building out of GBPUSD.
Euro Traders Look for Same Volume, Volatility as Pound on Eurozone GDP
Top event risk through Thursday’s trading session goes to the round of Euro-area GDP figures penciled for release. Traders anxious for opportunity out of volume are no doubt watching for a market reaction similar to the pound’s reaction to the BoE’s report. The short-term reaction to the data will likely struggle to hit that timbreas the quality of the event risk isn’t as decisive as what the sterling reacted to. That said, the growth figures can tap far deeper interests for the Euro. The region’s currency and financial markets have enjoyed an incredible recovery in the two years through May thanks to a delicate balance of circumstances and a heavy appetite for yield. Capital has flowed into the Eurozone looking to take advantage of depressed assets and high returns. Yet, those returns have deflated and the market is swollen. If growth starts to waver, it can lift Eurozone yields and break the dam on a capital reversal
British Pound Suffers Biggest Drop in 7 Months, Heaviest Volume in a Year
By far the worst performer for the day, the British Pound dropped between 0.4 and 1.2 percent (versus the yen and Aussie Dollar respectively) this past session. Though the July employment data printed worst than expected, the real catalyst for the day was the Bank of England’s Quarterly Inflation Report (QIR). One of the few opportunities to see what the central bank is considering for monetary policy – as regular rate decisions offer no guidance when no change is made – this assessment offered speculators a very tangible dovish shift. While the group still seems on path for a hike in the first or second quarter of 2015, certainty has been moderated with wage growth causing concern with its forecast halved by the group. Pound, Gilt yields and swaps all suggest hawkish conviction has been tripped up. And it can fall further.
Yen Crosses See Record Low Expected Volatility Levels as Range Matures
Realized volatility on USDJPY for the past three-month period has dropped to 4.2 percent – the lowest level on record. While that isn’t particularly remarkable in current FX and financial market conditions, congestion for the pair through 2014 and its sensitivity to speculative shifts tell us this is a booming quiet. Expected (‘implied’) volatility readings have begun to turn higher recently – indicating a growing concern. Another flush by capital markets is likely to carry the Yen crosses with it.
New Zealand Dollar: Carry Trade Is Rising
Over the past month, the New Zealand dollar has dropped between 1.6 and 4.0 percent (versus the Pound and Dollar respectively). This uniform slide is large part borne of the realization that the RBNZ isn’t going to hike rates for a fifth consecutive meeting – though it is still likely to pursue tightening. Speculators had over-estimated their rate forecasts at a time when carry trade is still historically low. But carry interest is still rising. We saw that in New Zealand data this morning which showed foreign holdings of NZ bonds rose to 65.1 percent last month – a 10 month high.
Emerging Market Currencies Split as Volatility Measure Stubbornly Buoyant
The iShares MSCI Emerging Markets (ARCA:EEM) ETF rose a fourth straight session through Wednesday (0.5 percent), but momentum is still lacking. In the currency tables, we find the field still mixed as there is little consistent and market-wide drive to capture the segment’s higher returns. However, there is still very much a lingering fear. The JPMorgan EM volatility index is still well above its one and three-month average.
Gold Volume and Volatility Levels Succumbing to Price Range
Gold put in for another quiet trading session Wednesday. While the 0.3 percent advance was the biggest move in a week, the day’s range was still a miserly $10.20. This commodity is stuck in congestion and looking for a spark that can actually carry it through a breakout. Meanwhile, volume on futures and ETFs are shrinking while the CBOE’s volatility index is losing hope that a serious swing can be mustered.