Forex: Dollar Top Performer In A Volatile, Risk On Trading Day

There were a lot of mixed signals between the rally in yen crosses, the stagnant S&P 500 and rise in volatility readings this past session. However, there was one development that carries fundamental weight: a strong bullish breakout for the dollar. The Dow Jones FXCM Dollar Index (USDollar) finally broke from its nearly-three month congestion pattern with an unexpected rally through 10,600 - essentially the mid-point of range between the 2009 peak to 2011 trough. This is a move that has also leveraged the benchmark to a two-and-a-half year high. Though the same heights weren’t evenly distributed amongst the majors, we nevertheless witnessed a similar level of conviction. USD/JPY was at the top of the list with its incredible break above 100 to fresh multi-year highs. AUD/USD reversed a previous rally to break the floor on 10 months of range. And, EUR/USD cleared a rising trend that traces back to low set in the end of March.

In fact, the dollar managed an advance against all of its major counterparts this past session. This is particularly remarkable because the currency’s primary fundamental appeal – as a liquidity-enforced safe haven – was not in charge. While there is plenty of reason to doubt the capital market’s incredible climb in the face of record low yields and moral hazard, performance follows capital. The S&P 500 and Dow Jones Industrial Average (favored risk benchmarks as they are popular, accessible and sensitive to external factors) were both holding record highs Thursday. In fact, we are currently seeing a general absence of sentiment as an overriding theme in the market. This has led many to believe that ‘risk trends’ are no longer valid as various speculative measures seem to be careening in different direction. Yet, should a spark set in motion a concerted wave of fear or greed; this written off fundamental thread will quickly return.

Interestingly enough, the most likely catalyst for a universal heave in investor confidence was also the motivation for the dollar this past session. Philadelphia Fed President Charles Plosser offered a blunt and sobering assessment of open-ended stimulus. The central banker said QE3 has offered ‘meager’ benefit, was adding more risk to the system, presented trouble for the eventual exit and should be tapered moving forward. This are not remarks investors who have used leverage and positioned into excessively risky assets want to hear as they depend on central bank-derived market stability. As it happens, Plosser is not a voting member; but the market recognizes the Fed is considering the costs of its efforts more closely. If concern that the Fed plans to cut the market off in the near future, we will see that elusive risk theme come roaring back with wholesale deleveraging that in turn exalts the greenback. However if the risk fire doesn’t catch, the dollar run may start to sputter.

Japanese Yen: USD/JPY Finally Breaks 100 but There is Reason for Caution
Next to the greenback, the yen offered up the most consistent move in the FX market. The currency suffered losses at the hands of all of its major counterparts. Where did this bought of weakness come from? As discussed above, there wasn’t a definable streak of risk appetite that would spur the carry-sensitive collective rallying. Nor was there an extraordinary catalyst on the yen’s docket. The March current account balance surged as the country extended its longest divestiture of US debt since 2008 and weekly capital flow measures showed another round of Japanese bond purchases this past week. This is a measure consequence of the yen’s changes these past months rather than a timely catalyst. The true driver for the market-wide tumble from the Japanese currency is likely the same trigger for gold’s selloff last month – a clear level, thin trading and the draw of a dense round of orders. After USD/JPY broke 100, the fuse was lit. That said, follow through lacked the momentum that gold exhibited. Further, this is a move that inherently demands fresh risk taking. Can the market support that?

Euro: When Does Record Unemployment and Recession Stoke Crisis Fears?
EUR/USD made a bearish break and dove towards 1.3000 this past session. Yet, this was a move that was more reflection of a strong dollar than weak euro. While the world’s most liquid pair carries heft when it comes to market-wide influence, trends aren’t born from the influence of a single pair. Yet, there is plenty of dry kindling under the shared currency ready to erupt with the proper provocation. This past session, the ECB published its monthly report with downgrades on growth (0.4 percent contraction in 2013) and inflation (1.7 percent the same period). Meanwhile Portugal and Greece reported new record high unemployment levels. These won’t be ignored if the markets start judging risk.

Canadian Dollar Traders, Be Ready for Volatility on Jobs Data
At this point, every trader should recognize the market’s sensitivity to meaningful event risk. While the upcoming Canadian employment data won’t tap into systemic sentiment, it can certainly generate heavy volatility for the loonie – just as the jobs figures for Australia and New Zealand did for their respective currencies. The consensus forecast is for a 15,000 net increase in jobs - plenty of room for surprise.

British Pound Quickly Moving to the Hawkish End of the Stimulus Curve
The Bank of England is perhaps the most hawkish of the major central banks. While the policy authority isn’t on a tightening path, the fact that they are not expanding their support of the economy and financial system with open-ended programs like the Fed, BoJ and ECB means they are perhaps the most conservative major central bank. That is sterling bullish, but it is also a passive consideration - driven when others inflate.

Australian Dollar Completely Reverses Gains, AUD/USD Break 1.0150
At one point Thursday morning, AUD/USD was up almost 100 pips from its well-worn range low. Spurred forward by a strong employment showing, the market was almost ready to forget that the RBA had issued a surprise rate cut earlier this week. Yet, that all fell apart after the US dollar stepped in for a substantial rally and made quick work of a 10-month support level at 1.0150. This major’s performance is particularly notable given it is the dollar’s optimal carry trade. Yet, RBA rate cuts, dubious risk trends and stimulus questions seem to shift the tides.