Dollar Eases For A Second Day, Dow Matches Strongest Rally In Years

The Dow Jones FXCM Dollar Index (USDollar) hasn’t fallen for three consecutive days since December 12. Yet, greenback weakness in the early hours of Wednesday’s trading session suggests we may match that performance mark this week. The benchmark currency’s performance has long run askew of its negative correlation to risk trends thanks to questionable convictions behind yield appetite and exceptional weakness of key counterparts (yen, pound and the Euro). The ‘end of stimulus is nigh’ conversation that was stoked by this past Friday’s drop in the jobless rate has run thin. Looking ahead, the February retail sales report is unlikely to carry its weight in the larger themes that concern dollar traders. Meanwhile, the Dow equity index has rallied 8 straight days – matching the most aggressive run in 16 years.

Euro: Signs of Liquidity Trouble, Watch Key Bond Auctions and EU Topics
There weren’t any acute fears arising from the Euro-area’s financial or economic backdrop this past session – an assessment made easily enough by the EUR/USD’s maintenance of a terminal congestion pattern (i.e. one that will inevitably end with a breakout). However, for those watch, there was a concerning number of headlines that should draw any fundamental trader’s concern. The Bundesbank (Germany’s national central bank) reported that it had nearly doubled its risk provisions through the past year to €14.4 billion with head Weidmann stating clearly that the region’s crisis was not over. That sentiment was echoed in news that Italy had to pay the highest rates on a 12-month bond auction this year (a side effect of the political gridlock), while the Greece-Troika meeting was delayed to the upcoming session and the Central Bank of Greece reported ECB borrowing surged four-fold to €76.2 billion. Coming up, both Spain and Ireland are expected to sell debt.

New Zealand Dollar: Is RBNZ Policy Speculation Going to Follow BoE Footsteps?
The kiwi has refrained from developing a clear and concise trend these past few weeks despite tangible moves in equity indexes (benchmarks for risk appetite) and volatility in New Zealand market rates. This hesitation is due to a combination of questionable commitment behind the sentiment-based positioning as well as an emergent – perhaps irrational – fear that the kiwi dollar will succumb to the same easing effort that its global counterparts have suffered via monetary policy. The drought in New Zealand has led many to believe the economic forecast will be further downgraded by an already pliable Reserve Bank of New Zealand (RBNZ) Governor Wheeler. Comments of a high currency and downside risks are not yet a threat of easing, but traders are sensitive to policy talks – and that is where we will look for the RBNZ rate decision Wednesday evening. If the rhetoric opens the door to possible easing, the kiwi could suffer from the same ailment as the pound – fear.

British Pound Extends Decline as Data Feeds Fear of Triple Dip Recession, Stimulus
The sterling was given a fundamental push this past session. The currency has been razed to the ground these past few months on the assumption that economic hardship and a government committed to austerity will lead the Bank of England (BoE) to offer relief in the form of fresh stimulus. However, the move has resided purely in the speculation column to this point as the central bank has not offered any guidance on introducing fresh support. Yet, speculation received a considerable boost with data this past session. While the trade balance for January managed to slim down to a six-month high 8.195 billion sterling, the factory activity and monthly GDP estimates more than offset it. Industrial production dropped 1.2 percent in the opening month while the February NIESR GDP estimate showed a 0.1 percent drop following a downwardly revised 0.2 percent contraction the previous month. A triple dip recession is a stronger call for stimulus.

Japanese Yen Advances for the First Time in 4 Days, Policy Officials Have Spoken
It is clear what is driving the Japanese yen crosses higher (or the yen down). After two days of testimony with the Upper House of Parliament, the lead nominees for replacing the Bank of Japan’s (BoJ) Governor and two Deputy Governors have finally curbed their threats of unrestrained stimulus moving forward; and the yen advances. We continue to drift in a fundamental limbo with the Japanese currency. On the one hand, we know that the new leadership with the BoJ will work to significantly amplify stimulus efforts and thereby act to drive the yen down. On the other, the currency has already dropped 25 percent against the dollar in less than six months…well before the stimulus efforts have been put into place. Some believe that we could have a ‘buy the rumor, sell the news’ situation with Japan; but it would likely be shallow even if it proved true. The real potential rests with the possibility of a risk aversion move spurring a deleveraging of low yield carry trades.

Australian Dollar Heading into Volatility with Thursday Jobs Data
We could assign the Australian dollar’s strength this past session to risk appetite trends, but there is little support an effective positive sentiment influence in that particular session when previous days have offered divergence. Far more remarkable as a driver for the high yield currency is the ongoing improvement in 12 month interest rate expectations. Measured by overnight swaps, the outlook now calls for only 20 bps worth of easing from the Reserve Bank of Australia (RBA) – the most conservative easing forecast in 19 months. In other news, a report from Norway’s sovereign wealth fund reported what we have seen hints of over the past months – that larger entities are buying into Aussie assets. The fund increased its holdings to 2.1 percent in 2012 from 1.1 percent. Moving forward, we are on data watch. Thursday morning will bring the Australian employment figures. This won’t be a ‘game changer’ report, but it is certainly worth its weight in volatility potential.