Dollar Eases Off Multi-Year High, S&P 500 Marches Higher

The dollar opened with some pep Monday – enough to post a fresh, intraday two-and-a-half year high – but the threshold for bullish momentum is significantly more difficult to achieve. For the Dow Jones FXCM Dollar Index (USDollar), the 520 pip or 5.2 percent advance since the beginning of the year has contradicted a very prominent fundamental theme – a rise in risk appetite trends. The sustenance of this unusual correlation has been made possible by a questionable level of conviction behind the sentiment push as well as well-timed troubles for the benchmark’s most liquid counterparts. That fortunate combination of factors can only last for so long however. The glow from the four-year low unemployment rate – specifically its marginal implication for an early withdrawal of stimulus in the second half of the year – from this past Friday has no doubt worn off. So, we move on the next round of event risk. On the docket, the House Budget Committee’s 2014 budget proposal is due in the upcoming session; but its supposed 10 year return to a balanced budget seems ambitious. Meanwhile, always keep an eye on risk trends.

Euro Steady After Italy Downgrade, Talk of German Voter Discontent
Expectations were set high for the euro heading into the open of the new trading week. Credit rating agency Fitch’s downgrade of Italy crossed the wires after most European traders were offline Friday, meaning this was the first opportunity for the new round of regional financial pressure to play through speculators’ assessments. Yet, the euro’s reaction to the Italian downgrade (to BBB+ with a ‘Negative’ outlook) was much like the pound’s reaction to Moody’s downgrade of the United Kingdom just two weeks before – absent. EUR/USD and EUR/JPY (the two most liquid pairings for the yen) were both higher through the opening session. Furthermore, a survey released in a German magazine that reported 29 percent of respondents said they would vote for a party that was anti-Euro in the September election was similar rendered impotent. In the absence of these fears, we could always fall back on the fact that the ECB is actually reducing its balance sheet – a serious euro booster – but EURUSD instead remains range bound between 1.3125 and 1.2965. Perhaps risk trends or the EU meeting later this week can tip the scales.

Japanese Yen Decline Restrained Despite Intensified Stimulus Expectations
The Japanese yen dropped across the board Monday, and continues to do so this morning. However, the pace with which the selling pressure was expressed was far more reserved than we would imagine given the intensity of speculation surrounding yen traders’ favorite topic: stimulus. We have been moving from rumor to rumor, first sustaining the yen crosses’ climb and then simply trying to hold back a reversal. The game now is to upgrade the threats – as actual policy cannot be taken until key members of a content Bank of Japan regime retires (March 19). BoJ Governor nominee Kuroda tried his best to intone a vow of action when he said derivatives, longer-dated debt and more risk asset purchases were all possible under his watch. But none of this is particularly new. What was novel was speculation emanating from a Nikkei report that suggested Kuroda may hold a meeting before the official April 4 meeting to implement a stimulus upgrade. Time and belief are running thin.

British Pound to Find Guidance in Data, Real Interest in BoE’s Plans
A new week opens to a familiar trend: the sterling under pressure across the board. The only major pairing that the pound was able to gain traction with Monday was in GBP/JPY – hardly a pair for fundamental inspection of anything but the yen. Once again, the market’s open fears of a Bank of England that is prepared to leverage its stimulus efforts through the proximate future seems to be the culprit for speculative interests. Of course, unless the Monetary Policy Committee (MPC) under Governor King’s guidance moves to adopt something more than a 25 billion pound increase in stimulus in the near future, it will be a long wait until July to see what income Mark Carney will adopt. Our interest should turn to the immediate future. On the economic docket, we have scheduled updates on factory activity, external trade and a general GDP estimate. This is a good round of data to keep us occupied until Thursday’s BoE Q1 Bulletin.

Australian Dollar Rallies as Yields Hit 10-Month High, Rate Outlook Improves
There was standard, Aussie-based event in the morning hours of the Tuesday trading session; but it seemed to carry limited weight in terms of trend development. That said, AUDUSD managed to hold and retreat after a tentative push above 1.0300, suggesting there was at least some influence to the event risk. On tap, we were watching the NAB business sentiment survey for February which slipped both on current and forecast measures. Coupled with the weekend release of the Chinese manufacturing, retail sales and funding data; this seems a credible concern for regional investors. That said, this is limited risk against a rising potential for return. The most hawkish outlook for the RBA (pricing in only 18 bp of easing) since August 2011 and a 10-month high 3.62 percent 10-year bond yield pair nicely for a ‘cheap’ carry currency.

New Zealand Dollar Outpaces All Counterparts, Bond Auction Shows Demand
Top billing through Monday’s session goes to the New Zealand dollar with an advance of 0.3 (versus the Swiss franc) to 1.0 percent (against the Japanese yen). The collective strength certainly found support in stable speculative appetite trends – measured by steady equity performance through the three sessions – but there was hardly the even distribution of influence across the FX markets. In other words, there was something more than basic carry trade going on for the kiwi. Additional support for the currency would come through the impressive 8 bp jump in the 10-year bond yield on the session. Further, a short-term debt auction showed exceptional demand – 5.17 times the offer on one-year paper.