Talking Points:
- Dollar Ends Congestion with Collapse
- Euro Receives Further Encouragement for QE
- New Zealand Dollar: RBNZ Says ‘May Intervene’
Dollar Ends Congestion with Collapse
Following one of the quietest trading days in the Dow Jones FXCM Dollar Index’s (ticker = USDollar) history, the currency suffered its biggest single-day selloff in a month and tumbled to lows not seen in six months. Now the question is whether this is the opening move in a new trend or merely a normalization to the extraordinarily tepid trading conditions as of late. First and foremost, it is important to appreciate that this was a dollar-based move. The greenback tumbled against all of its major counterparts – from a 0.4 percent drop versus the Euro to a 0.8 percent slump against the Australian dollar. And, these were not minor price developments for the core majors. EUR/USD broke above 1.3900 and revived the market discussion over how committed the ECB is in keeping this pair from contributing to deflation. USD/JPY took out 102 and a trendline that has shaped the pair’s bull trend over the past 15 months. Meanwhile, GBP/USD extended its reach to a fresh five year high and has more than a few FX participants wondering whether the BoE may be anxious over its own currency’s strength.
There are clearly two elements to the greenback’s progress: the currency’s own fundamental drive and the consequences it holds for its global counterparts. In this slump, a few convenient catalysts have been targeted. Some believe it was a delayed response to last week’s NFPs while others suggest the OECD’s updated forecasts or the recent trade report undermine Fed rate forecasts. Markets are nowhere near inefficient enough to produce such a delay. Meanwhile, neither Treasury yields nor swaps reflect a material change in trend for rate forecasts. If a major theme was not responsible for this spark, it is difficult to imagine a trend following on its heels. That doesn’t mean momentum can’t development; merely that we need something tangible for traders to unite around – perhaps Fed Chair Yellen will contribute to that today.
However, as we plot out the dollar’s course, it is vital to remember that this is a relative market. If the greenback isn’t proactive in finding its bearings, its counterparts can alter its value. That is a very considerable factor to remember with this currency. We have heard threats or seen action targeting a depreciation of the Euro, Japanese Yen, Chinese Yuan, Australian and New Zealand dollars over the past years.
Euro Receives Further Encouragement for QE
Over the past weeks, we have heard numerous parties – Eurozone government heads, certain ECB members, foreign governments, and the IMF among others – encourage the ECB (European Central Bank) to adopt a fresh round of stimulus to fight deflation and fend off economic trouble. Add another voice to the din. In the OECD’s updated forecasts, the group called on the bank to act to change the trajectory of low inflation. These concerns are certainly not unfounded – nor are they even surprising against the backdrop of this week’s data. So far, we have seen an easing in investor confidence, a sustained drop in factory prices and downgraded EC inflation outlook. Onto Thursday’s meeting.
New Zealand Dollar: RBNZ Says ‘May Intervene’
Reserve Bank of New Zealand(RBNZ) Governor Graeme Wheeler doesn’t like the level of the currency and he is ready to take steps to arrest its ascent if need be. These were the sentiments the policy head relayed clearly to the market this morning. In his remarks, Wheeler reiterated that the Kiwi dollar was overvalued and its level was unsustainable. His suggestion that should ‘fundamentals worsen’ the central bank could intervene is an explicit threat to bulls – and there is little doubt this has as much to do with the exchange rate as standard indicators. Yet, intervention is not effective for New Zealand. Far more concerning was his warning that the NZD will be a factor in future rate decisions.
Yen Crosses Unnerved by USD/JPY’s Slip
The Japanese yen was modestly higher against most of its major counterparts this past session and the S&P 500 – as a benchmark for risk appetite and carry demand in the FX market – has not devolved into a bear trend. However, USD/JPY’s drop Tuesday has put yen cross traders on high alert. These pairs are highly correlated, which means stability for the major can anchor errant moves. But traders are certainly aware of the risk that one break can start a landslide. Meanwhile, QE hopefuls noted Japanese PMI data this morning plummeted on the tax hike.
British Pound: Data Jump Leverages Rate Forecasts Higher
There was a variance in performance for the sterling between GBPUSD and the other crosses. The former hit multi-year highs in a clean jump while the others presented a more modest performance. The pound itself, however, had a robust fundamental backdrop to engage bulls – namely through rate expectations. PMI figures release this past session beat expectations and the OECD offered up a hefty upgrade to its UK GDP forecast. Two-year Gilt yields and 1y2y swaps both responded by hitting fresh three-year highs.
Chinese Yuan Posts Biggest Rally in 11 Months
For a currency that moves in a managed band, the Chinese Renminbi posted a hearty rally. USD/CNH posted its biggest drop in 11 months Tuesday – a concerning point to do so given the publicity surrounding the pair’s bull trend over the past months. Yet, when we look moves of similar magnitude going back the past few years, they rarely turn into lasting trends. Data and financing health will be important to watch.
Emerging Markets Post Uniform Advance Vs Dollar, Not Much Else
Against the US dollar, virtually all of the Emerging Market currencies posted gains. Yet, when we switch in more stable currencies to benchmark the risky group against; the statistics decay very quickly. From the risk backdrop, equities and high-yield assets were notably struggling. Pricing considerations aside, the standout advance in the group was the Russian Ruble which continues to suffer heavy volatility amid Ukraine tensions.
Gold Weakness Masked by Dollar’s Own Tumble
The commodity sector is another place we need to consider our pricing utensil when analyzing our target asset’s strength. Gold actually fell 0.2 percent on the day which should be considered remarkable. If the dollar was down so significantly across the market, why did the metal end the day lower? Because its own drop was more substantial. Concerns of a stimulus withdrawal and tepid inflation are an unflattering mix.