Dollar Fails To Break EUR/USD’s 1.2750 Support As Risk, QE3 Fears Steady

Stimulus will end…eventually. And, this realization sent a shudder through the market when both the FOMC minutes and Federal Reserve Chairman Bernanke noted that the central bank will likely temper QE3 in the coming months. Yet, how sensitive are the markets to this eventuality? If it was the mere recognition of the end to perpetual expansion of the Fed’s balance sheet that would spur speculators to abandon ship, we would have seen the S&P 500 build its sharp reversal Wednesday into a persistent trend and found the dollar driving EURUSD below 1.2750. Yet, neither critical escalation was realized this past session. The benchmark equity index closed its first back-to-back decline in five weeks; but it would also posts its biggest intraday, bullish recovery this year. Meanwhile, the combination of risk and money supply (the supply-and-demand aspect of balance sheet building) wouldn’t prevent the greenback from dropping against all of its major counterparts Thursday. Yet, despite the offsetting effort, neither investor sentiment nor dollar appetite are secure.

Though initially lost in the pang of fear Wednesday, both Bernanke and the minutes presented a case for maintaining the status quo at least through the immediate future. The central bank Chairman did suggest that a reduction in purchases may be in the cards over the coming months, but he also stated clearly that withdrawal too quickly could stall the recovery – an outcome any policy authority looks to avoid. Similarly with the transcript from the last FOMC gathering, the note of “some” members suggesting a tapering as early as June doesn’t overwhelm the “many” that said a downward shift in policy would require more progress. In a majority vote, the numbers are clear. Adding to sense of moderation the past session, St Louis Fed President Bullard reiterated his belief that the Fed isn’t “that close” to easing its support. Given these assumptions, the eventual taming of the QE3 stimulus program will depend heavily on the data over the coming weeks.

As ambiguous as the Fed is looking to be and hesitant as they are to make the first move to leveling off, a few additional months of $85 billion Treasury and MBS purchases won’t necessarily ensure risk appetite’s buoyancy. The divergence between exposure at these record market levels and the traditional fundamentals behind investing is extreme. Given the historical low in benchmark global rates, commitment to the highs in capital markets and carry necessitates arid volatility levels and steady capital gains (rising prices for buy-and-hold investors). It doesn’t take much for early profit taking to devolve into committed selling under these conditions. And, we don’t need a heavy-handed signal for that…

Japanese Yen Surge Tracking – Not Leading – Nikkei 225 Tumble
Volatility behind the yen, Nikkei 225 and 10-year Japanese Government Bond (JGB) yield has soared over the past 24 hours. And, what makes this particularly worrisome is that the increased turnover looks like it may be semi-permanent. In the wake of the Bank of Japan’s policy meeting where they announced a wait-and-see approach with their objective to increase the nation’s monetary base by ¥60-70 trillion, there is a distinctive risk that a dependence on constant escalation can scare the traders off. A steady appetite for JGBs, ETFs and J-REITs from the BoJ can keep the ship steady; but any troublesome weather will capsize carry trades that currently provide record low yields after having rallied 25 percent up from record lows. Doubt is already set in. The Nikkei 225’s attempt to retrace some of its incredible 1,110-pip loss Thursday has already fallen apart. Renewed selling through Friday’s session has pulled the benchmark index to a 10 percent drop from yesterday’s peak.

Euro Finds a Mixed Bag as PMI Figures Pick Up, Spanish Bond Demand Slows
The euro struggled to produce its own move. The currency’s biggest loss was found against the yen while its heartiest jump was won versus another safe haven – the dollar. The same split was noted between higher yielding currencies. From the euro docket, the regional PMI figures (treated as timely updates on growth trends) printed better than expected. The Eurozone Composite beat with a 47.7 reading, but it is important to remember that this is still a measure pointing to economic contraction. Meanwhile, the effort to take advantage of passive markets seems to be hitting a barrier. Spain recorded the first increase in yields and drop in demand in three months during a sale of 3, 5 and 13-year bonds.

Australian Dollar Refuses to Jump Start Serious Recovery
Risk trends made a bid to recover lost ground this past session, but the Australian dollar’s effort to ride this move’s coattails fell apart rather quickly. Furthermore, the highest benchmark-yield major never really gained traction against safe haven counterparts – indicating individual weakness beyond carry unwind. It is worth noting that the AUDUSD’s correlation to the S&P 500 is the most extreme, negative seen in nearly a decade. Meanwhile, open interest in Aussie government bond futures has advanced to 2008 highs – an indication of hedging losses?

British Pound Slides after GDP Details Show Weak 1Q Triple Dip Miss
The United Kingdom barely avoided the painful label of a triple dip recession, but the economy doesn’t seem to be seeing much of the recovery that truly matters. With the second reading of the 1Q GDP figures released this past session, we were given details on performance. Personal spending and government spending slowed, while exports and investment both actually contracted. A Triple Dip in spirit perhaps.

New Zealand Dollar Slide Continues but Hardly Accelerates on Weak Trade Data
Trade is New Zealand’s bread and butter growth-wise, but there was little strength to be found in the April figures that crossed the wires this morning. The trade balance figures for last month printed NZ$157 million – the biggest miss of the consensus forecast in years and a reversal from the two-year high from the previous month. Despite the negative implications, the kiwi’s controlled decent held retrained.