British Pound Faces Heavy Event Risk after Massive Decline

Despite a pickup in competitive stimulus talk over the past 24 hours, the dollar still suffered a slip this past session. The greenback dropped against most counterparts through Tuesday and continues to give up ground through the early trading hours Wednesday. That has lead the Dow Jones FXCM Dollar Index (USDollar) to extend its pullback from Monday’s spike high and threatens to pull the benchmark below 10,300. Despite the shift, bullish appetites wouldn’t be difficult to rouse if the right buttons were pushed. First and foremost is the constant threat of a serious risk aversion move. Should fear undermine the stimulus-sedated and complacent attitude of capital markets, the luxury of seeking an asset that provides both safety and competitive return goes out the window. In that scenario, the market moves to the dollar. That said, the S&P 500 hit its highest level since November 2007. Yet, with a pickup in blatant stimulus threats, we the dollar may firm up even without fear.

Euro Climbs as Investor Sentiment Improves, Bigger Tests Ahead
With a relatively light economic docket and round of headlines this past session, the euro was offering a relatively controlled performance this past session. At the top of the docket was the Eurozone ZEW survey – an investor confidence measure. With tail risk dropping and regional equity indexes recovering ground quickly, the survey offered a hearty jump to its highest reading (48.2) since April 2010. Though, it is worth noting that the current conditions component reported a drop on the month. From the headlines, the only thing of note was a story that Spain may try to sell a bond in dollars next week (diversifying investors) and Italian Prime Minister candidate Berlusconi’s remark that the ECB must back sovereign debt to support the euro. These are interesting but not the market’s primary focus. With stimulus still in focus, the contracting ECB balance sheet still carries the weight of the euro. That means the report of the first LTRO2 repayment on Friday is top event risk.

British Pound Faces Heavy Event Risk after Massive Decline
The volatility risk over the coming session is exceptionally high for the pound. On tap we have two key pieces of event risk: the Bank of England (BoE) minutes and January employment figures. The first look for the simultaneous release will be to the labor data for the simple reason that they are easier to interpret as a ‘better or worse’ outcome. For an economy that is currently slogging through a triple dip recession, labor figures are essential fundamental measures. The jobless claims change from the previous read gave a boost but the 5,500-person drop in jobless claims expected this go around sets up an opportunity to surprise in either direction. Simplicity aside, the far more important event for the sterling is the central bank report. The sterling has dropped 5.3 percent against the dollar and 6.8 percent against the euro since the beginning of the year on building fears that the BoE will play catch up to its global counterparts and ramp up stimulus efforts. That is a long way to move on conjecture alone. If these minutes don’t offer some hint of vindication, shorts may start pulling back on their exposure.

Japanese Yen: Officials Back Off Yen Threats, Modestly
Despite the firm performance in equity markets, the funding currency / safe haven Japanese yen gained ground Tuesday and continues to push ahead this morning. Once again, policy officials kept the newswires warm and a market that has a serious addiction to stimulus speculation was certainly in the mood to digest everything they had to say. Yet, since the G20 statement, we have seen that the most important policymakers have backed off their explicit effort to devalue their currency. Perhaps most bombastic was Bank of Japan member Morimoto who said the weaker currency was good for exports and that unprecedented easing was on tap for 2014. In contrast, Prime Minister Abe and Finance Minister Aso both remarked that they weren’t considering a foreign bond buying program (a serious stimulus enabling program) or change to BoJ independence laws. The market is hungry for more stimulus news and the yen is oversold. Without fresh stimulus fuel, we may turn.

New Zealand Dollar: Did the RBNZ Governor Enter the Currency War?
Though the Reserve Bank of New Zealand (RBNZ) Governor’s scheduled speaking engagement this morning was supposed to focus on the nation’s currency (the kiwi), there was little expectation that the commentary would draw much in the way of highlights. Yet, Governor Wheeler proved those expectations very wrong. From a policy stance where the central bank has kept a loose threat to raise the benchmark rate somewhere in the vague future, Wheeler took a strong turn by suggesting he was ready to join the currency war that global officials have assured us is not taking place. The assessment that the New Zealand dollar is expensive is nothing new – but in context with the new warning that he was ready to intervene on behalf of the currency should the situation demand it is a serious change. Since this serious red flag was raised, we find the kiwi sharply down Wednesday between a 0.67 percent drop against the Canadian dollar and 1.11 percent versus the yen.

Swiss Franc Eases as SNB President Maintains EUR/CHF Focus
Swiss National Bank officials must recognize the trouble facing the Eurozone should its economic troubles jump back into the financial realm. Or perhaps they fear the monetary policy officials in its primary trade partner will wisen up and join the stimulus effort to ease pressures at home. Either path would lead to trouble for the Euro and once again drive capital into the comforting arms of the Swiss banking system. SNB President Jordan reiterated his warning Tuesday that the central bank will defend the 1.2000 EUR/CHF exchange rate with unwavering commitment. We are still trading approximately 350 pips above the imposed floor, but it wouldn’t take much of a shock to once again test the SNB’s commitment.