Talking Points:
- Dollar Advances on the Back of Its Counterparts
- British Pound Volatility Risk as BoE Weighs in on Rate Forecast
- Euro Marks a Key Breakdown On Historically Weak Event Risk
Dollar Advances on the Back of Its Counterparts
Where is the dollar’s strength coming from? The currency is up against all its major counterparts with the exception of the New Zealand dollar and the Dow Jones FXCM Dollar Index has put in for its first five-day consecutive climb in six months. Yet, there was little buoyancy to be found in the traditional outlets for strength. From the all-consumer ‘risk’ theme, we found the high profile S&P 500 holding to its record high with the same dubious aura of conviction that we have questioned over the past months. Meanwhile, the interest rate bearings for the dollar actually diminished this past session. Treasury yields slipped on the session throughout the curve. In the absence of a bid from safety appeal or yield forecasts, thecurrency still found substantial buoyancy in the weakness of its counterparts. Rrate forecasts for the euro and pound offered a material, indirect bid ahead of substantial event risk from the two regions – just as effective as dollar-sourced strength.
While the dollar has found substantial lift from the weakness of its counterparts, this is not likely to be a source of drive that evolves into a substantive bull trend. Beyond the recent breakdown from EUR/USD and the expected volatility from GBP/USD, greenback traders are looking ahead to Thursday’s Consumer Price Index (CPI) to revitalize interest rate speculation – for better or worse. The upstream Produce Price Index (PPI ) for April is due in the upcoming session and will offer a lead in. And, of course, we should always be prepared for any unexpectedly swift ‘risk’ based moves.
British Pound Volatility Risk as BoE Weighs in on Rate Forecast
A retreat from the British pound this past session is likely a last-minute adjustment in anticipation of the Bank of England’s Quarterly Inflation report due today. The sterling slipped 0.3 percent against the US dollar and 0.1 percent versus the Japanese yen. Compared to the currency’s imposing bullish bearings over the past year though, the correction hardly defuses the potential for volatility as the event risk taps into interest rate expectations. In the months since the UK began its booming economic recovery and Mark Carney took over the BoE last summer, the pound has rallied against all of its counterparts – with a noble 12 percent climb for GBP/USD. Central to the currency’s buoyancy in recent months is the belief that the central bank is on track to begin a hawkish rate regime well before its major counterparties – including the Fed. Whether we look at bond yields or swap rates, the market’s hawkish lean is the strongest in three years. While data has improved and the BoE has long moved away from QE, a hike in the first few months of 2015 or final months of this year is difficult to live up to. The level of hawkish tone the market needs to sustain its run is high. Meanwhile, the possible sterling retreat should the dovish tone remain would be severe.
Euro Marks a Key Breakdown on Historically Weak Event Risk
The euro’s sharp retreat this past week was the distinctly the impetus of the ECB’s stimulus threat. Given the heft of the fundamental push needed to force the EUR/USD and EUR/GBP retreat, the next step to break critical support (1.3750 and 0.8150 respectively) would theoretically have to be astounding. This past trading session, a disappointing eurozone ZEW investor sentiment survey aligned nicely to the euro’s slide. Yet, historically this indicator has struggled to draw more than 10 pip move from the currency. While the level of surprise is a factor, the real change is the underlying shift in expectations. Moving towards stimulus has the market looking for evidence of capital outflow.
Japanese Yen Crosses Find Limited Lift from S&P 500
While the S&P 500 – as a benchmark for risk appetite – is hovering at record highs, the yen crosses are showing little motivation to reverse recent range selloff much less return to their multi-year highs. The lack of conviction seen in these capital market benchmarks is laid bare with risk measures like the yen pairings. In the absence of a limitless stimulus vow from the BoJ, the market is more critical of the fundamental value for pairs like USD/JPY and EUR/JPY. Beware, the one-month implied (expected) volatility reading on USD/JPY is now at a record low.
Chinese Yuan Ticks Higher as Capital Markets Ebb after Weak Data
Data from the Chinese docket this past trading session was notably disappointing. As a broad view of the domestic economy, readings for April retail sales, fixed assets and industrial production all managed to fall short of consensus – though not in a material way as is the habit of Chinese data. The economic pinch was modest according to the Shanghai Composite (SSEC)and local yields. Traders watching USD/CNH have noticed that the rebound of the past week has stalled and broken lower. Unless general risk and emerging market appetite builds though, ambitions will be low.
Emerging Markets: Ruble Closes at 3-Month High While Group ETF Hits 6-Month Peak
The iShares MSCI Emerging Market ETF (EEM) rose another 0.4 percent this past session. While modest, this nevertheless pushes the benchmark to its highest level in six months. Meanwhile, the Bloomberg EM Sovereign Bond Index is trading just off a record high of its own. Appetite for investment into the riskier class is showing preference for asset type – typically a sign of trepidation. In the FX rankings, the performance was broadly split. However, a 0.7 percent rally for the Russian ruble and 0.6 percent rally for the Indian rupee lead the gainers.
Gold Contracts within Range as Inflation and Rate Updates Approach
Volatility readings on gold are fading – a concerning development rather than reassuring. While the retreat in the Chicago Board Operations Exchange (CBOE) Gold Volatility Index to a 13-month low is encouraging for stability following last April’s collapse for the metal, the more immediate active measures come with a more contrarian sensation. Gold has worked its way into a tighter trading band having deferred to complacency between $1,315 and $1,275 over the past six weeks. With event risk weighing in on US, eurozone and UK inflation and rate forecasts over the next 48 hours, be wary.