Talking Points:
- Dollar Gains on Euro’s Weakness, Rate Forecast Needed for Trend
- Euro Tumbles after ECB Warns of Easing in June
- British Pound Faces Data Today and Heavy Hitters Next Week
Dollar Gains on Euro’s Weakness, Rate Forecast Needed for Trend
Though ultimately little changed on the day Thursday, the dollar put in for exceptional volatility. Early session losses were completely reversed with distinct help from the EUR/USD. When it comes to a relative value market, material counter-currency flows can strong-arm others. Given that this is the most liquid currency by a wide margin, the biggest drop in 8 weeks and a severe swell in volatility would ensure the greenback mirrored the action. Outside of that benchmark pair though, the dollar’s pair was mixed and notably leaned to the bearish side. A range of Fed speakers was the highlight of the newswires, but neither Chairwoman Janet Yellen nor her colleagues would say anything material enough to necessitate a change in positioning. For the dollar to take trend either a collapse in general risk trends or a return to hawkish rate forecasting is needed. On the later topic, next week’s CPI report will carry a material impact on the discussion.
Euro Tumbles after ECB Warns of Easing in June
The ECB managed to navigate a speculative minefield Thursday without setting off a market-based crisis. The first thing the market would see from the central bank was that monetary policy was held steady. The benchmark rate was kept at 0.25 percent and no new unconventional measures were adopted. However, if the group had left it at that, EURUSD would have certainly crashed through 1.4000 and undermined ECB’s credibility – considering they had stated clearly that the high exchange rate was contributing to weak inflation. So, in his comments, President Draghi stated bluntly that the euro’s high level was cause for ‘serious concern’ and that the central bank was comfortable acting in June if needed. This was a step further to reassuring the market that more accommodation is coming. To not follow up on this threat would see the euro rally and their credibility cast into doubt. The market will now start to weigh in on what programs the ECB will pursue and its impact.
British Pound Faces Data Today and Heavy Hitters Next Week
Like the dollar, the British pound GBP/USD was a secondary player this past session to the Euro’s volatility. However, the sterling may find a drive of its own going forward. In the upcoming session, the docket offers a couple noteworthy pieces of event risk that can shape the ongoing discussion on whether the Bank of England will indeed hike rates ahead of its official forecast. The March trade balance and industrial productive figures are noteworthy market movers in their own right, while the NIESR GDP estimate for April will give a bigger picture view. The real speculation begins though next week when the BoE delivers its quarterly inflation report with updated forecasts.
Japanese Yen: Three Crosses Break, But Still Lacking Yen Trend
As expected, EURJPY was forced into a breakout scenario between an exceptionally narrow trading range and the influence of the ECB rate decision. Given the Euro and Swiss Francs high correlation, CHF/JPY was pushed into a bearish technical break as well. With USD/JPY’s move earlier this week, we now have three core yen crosses that have cleared symbolic but exceptional levels of support. Traders should remain on guard. While there is a distinct ‘risk’ sensitive for these crosses given carry’s dependency on low volatility and yield demand, capital flows is what truly drives the market. Have enough individual pairs fold, and momentum builds. Looking at next week’s docket, traders should keep tabs on Monday’s trade figures and Thursday’s 1Q GDP release.
Canadian Dollar Charging Higher into Employment Data
Lead by a break to four-month lows for USD/CAD, the Canadian dollar put in for an impressive day Thursday. The loonie advanced against all of its major counterparts (0.1 percent versus the Aussie to 1.1 percent against the Euro) with encouragement from a strong housing starts report for April. A lasting drive, however, requires a driver with a little more depth. Theupcoming employment data for April is certainly higher on the event risk pecking order. Once again, the consensus for payrolls is set low (13,500 jobs added) and makes it easy to generate reaction on a material surprise. Yet, for trend, this indicator only has so much pull. Watch the 10-year yields spreads to gauge conviction.
Chinese Yuan: Drop in Yields Signaling General ‘Flight to Quality’?
The spread between the offshore and onshore (CNH and CNY) Renminbi has narrowed and stabilized over the past month. That – like the retreat in the 1-month implied volatility reading from 3.61 to 2.00 vols – is another indication that the Chinese currency’s dramatic decline is cooling off. However, it doesn’t insinuate that the trend has been turned. Looking across the country’s assets, we find the Shanghai Composite is hovering above 9-month range support around 2,000 while the 10-year sovereign bond yield slips to six-month lows of its own. This shift of capital towards safe havens speaks to the sentiment within the region. It wouldn’t take much to – perhaps a global slip in risk – to broaden the market’s scope of safe haven to the international stage.
Emerging Markets: Risk EM Currencies Climb, Russian Ruble Tamed
The positive lean for risk trends would help lift the Emerging Market sector. However, as with the developed world financial system, investors are showing a preference in EM assets. Looking at the MSCI ETF, the capital market benchmark posted a modest 0.2 percent contraction on heavier volume. That said, the Bloomberg EM Sovereign Bond Index is accelerating into its 12-month high. With another 0.4 percent climb, this measure will break to a record high for its short history. For individual performances, the South African rand was a notable outperformer. Falling off its pace though, the Russian Ruble dropped 0.3 percent versus the dollar before its run could even begin. Ahead, we have Argentina 1Q GDP. Of more systemic interest, the Donetsk region of Ukraine is still on for a referendum vote and India’s elections close next week.
Gold Tumble Cools Before Bears Can Take Control
Following Wednesday’s sharp decline, spot gold’s moderating move yesterday – a $0.60 nudge lower – kept the market from fully rolling over to the bears. The market has carved out a hard floor for its sentiment down around $1,275. To drive metal below that figure, a fundamental or positioning spark is needed. At the same time, bulls have failed to revive the strong drive through the first quarter with subsequently lower peaks. A rise in open interest via futures should put speculators on alert. Today’s COT figure will give a positioning update. The SSI shows retail traders are still net long on the metal with 1.56 longs per each short. If GDP and CPI figures next week stir the central banks, it will move gold.