Dollar Advances On Carry, Stumbles Against Safe Havens And Euro: April 17, 2012

Given the complex web of fundamentals we have had to follow for the dollar recently, it is easy to become lost in the ‘why’ of the currency’s tumble Monday. In fact, the explanation for the benchmark’s stumble doesn’t have to go much further beyond its own inactivity level. Looking for fundamental cues for the session, we note: underlying risk trends were unmoved and relatively reserved on a volatility basis; the modest premium in the US benchmark 10-year Treasury yield was little moved at its already deflated 1.98 percent; and scheduled event risk did little to alter either the growth or stimulus consensus.

In essence, the greenback was left adrift and exposed to the strength or weakness of its most liquid counterparts. That exposure translated into an interesting mix for the majors. Relative safe haven USD/JPY was the biggest hit for the dollar (0.65 percent) while an impressive showing for the euro triggered a sharp reversal from 1.3300 and 0.49 percent rally.
 
When liquid pairs such as EUR/USD (the most liquid FX pair, accounting for 28 percent of total daily FX turnover as estimated by the BIS’s 2010 triennial report) and USD/JPY (14 percent) post large moves due to non dollar-based factors, the impact is nevertheless felt. Naturally, the Dow Jones FXCM Dollar Index (an equal weighted index of EUR/USD, USD/JPY, GBP/USD and AUD/USD) would reflect the stand out volatility of its components.

Despite an early morning advance, the US dollar ended Monday painted in red, though it has buffer room until we start talking about a serious turn lower. For the bears to really gain traction, we’d have to slide below 9,900. Until then, we remain in a broad range.
 
Over the next 24 hours, the focus remains on the cross winds from the euro-area’s situation as well as general risk appetite trends. For general sentiment bearings, the S&P 500 ended Monday’s session virtually unchanged as the better than expected 0.8 percent retail sales reading garnered little interest from either QE speculators or relative growth watchers. That being the case, it is wise to similarly put little weight on the influence of the upcoming housing and industrial production data scheduled for release. Instead, keep tabs on equities and Treasury yields.
 
Euro Rally Outpaces General Risk Trends, Funding Concerns Ease
 
The euro put in for a standout performance Monday – advancing against all of its major counterparts with the exception of the Japanese yen and the warped safe-haven Swiss franc. This strength should be considered tentative as it was more of a relief from recent pressure rather than outright strength. A few headlines that eased the tension on the depressed euro included news that the ECB didn’t reactivate the SMP government bond purchasing program, a reduction to €1.928 trillion for the Italian government debt load and vows from French President Sarkozy that he would push for the ECB to support growth (rather than keep the focus expressly) on inflation if reelected.

There is an element of bullishness behind all of these considerations, but the risk of a reemergence of regional crisis fears is just below the surface. On that front, we will see if the market has an adverse reaction to shorter-term Greek and Spanish bond auctions tomorrow (scheduled for 4:30 GMT). If fear the focus turns back onto the unchecked regional financial crisis, fears of spillover will dot the headlines once again.
 
Canadian Dollar: What Should We Expect From BoC Rate Decision?
 
The Canadian dollar followed in the footsteps of its US counterpart – deferring to the strength of its more active counterparts rather than leveraging its own momentum. For event risk, the strong inflow of capital (CAD 12.5 billion) measured by February’s international securities transaction report was notable but not particularly remarkable given the volatility of the series.

The upcoming Bank of Canada rate decision is similarly of dubious influence. There is little chance of any change in rates (both the markets and economists agree on that), but the outlook from the group can steer the ship going forward. Just this past meeting, we saw a notably, hawkish shift from the group. Will they expand?
 
Australian Dollar Diverges From Euro Strength, RBA Minutes Keep Bearing Bearish
 
Speaking of policy bearings, the Reserve Bank of Australia was tapping into the market’s rate expectations by releasing the minutes of its last policy decision. Governor Stevens had already left us with a dovish outlook with the comments he released alongside the announcement that rates would be left unchanged. That said, the lowered view of growth and reiteration that the case for a rate cut would be made in a moderated inflation outlook cemented potential in reality.

As of now, the market is pricing in an approximate 90 percent chance of a 25 bp cut at the May 1st meeting and expects a total 96 bps of cuts over the next 12 months. Until next week’s 1Q CPI reading, we’ll watch risk trends for guidance.
 
British Pound Faces CPI Data, But Are Rates Really In Question?

For those pound traders monitoring the economic docket this past trading session, a false sense of cause-and-effect could have been drawn off of the strong showing from the Rightmove House Price Index (hitting 3.4 percent expansion on a year-over-year basis and showing record prices in London). However, this particular reading is as far dislocated from growth and inflation expectations as we can get. What really matters for sterling traders is that the 10-year gilt yield is threatening a break below 2.0 percent and CPI is due in the upcoming session.
 
Japanese Yen Gains Further Traction On Dollar, Azumi Vows IMF Contribution
 
Monday would offer us an interesting fundamental read for the Japanese yen. Though underlying risk trends were little changed, the yen nevertheless managed an impressive rally. Forging progress against the highest yielding counterparts isn’t too difficult to do in calm risk seas, but posting substantial gains against fellow haven US dollar suggests an unusual strength against JGB rates that are at 17-month lows.

It seems carry unwinding is on a self-sustaining run. That is a problem for policy officials looking to devalue their burdensome currency. Perhaps Japanese officials are trying to rectify this situation in their recent vow to contribute $60 billion to the IMF. That’s another USD/JPY transaction.