Dollar Feels A Slight Qe Pang After NFPS, Bigger Waves Ahead: April 9, 2012

The unique opportunity for currency traders to react to the March NFPs report without the broader capital markets complicating the reaction didn’t do the dollar any favors Friday. The disappointing data and shallow market depth translated into a measured retreat for the greenback. But, the benchmark currency may yet find redemption through the coming week.

We have an excess of high-potential fundamental drivers ahead of us – the kind that can change the course and pace of investor sentiment. A dense board of catalysts for a market that has been unsettled by the implications of stimulus withdrawal and revived financial strain in the eurozone creates a perfect opportunity to trade in the subdued markets of the past months and return to the type of themes that revive market-wide correlations.
 
We should start our assessment of what the coming week can bring by reflecting on the inauspicious bearings of the benchmark S&P 500 Index through the past week and the notable drop from the Dow Jones FXCM Dollar Index in response to Friday’s payrolls. Many benchmarks for sentiment (carry, commodities, high yield bonds, etc.) have conspicuously underperformed equities – raising concern. As such, it may have struck some as unusual that the dollar actually dropped in the wake of wide, 120,000 miss for last month’s NFPs.

As a safe haven, we’d expect the dollar to rally on the disappointing news, right? Perhaps if capital markets were online for the release, we could have generated a stronger current in risk trends; but instead, this news would tip the finely balanced expectations of the Fed’s next move on monetary policy: further easing before the year is out or a first rate hike (and eventual balance sheet wind-down) by 2013.
 
To be clear, the US dollar has not abandoned its role as a favored safe haven asset through its position as the world’s primary reserve currency. Rather, we simply have not had a meaningful deleveraging trend since 2012 began. In fact, the modest 0.7 percent drop from the S&P 500 this past week was its worst performance since the period ending December 16th. We need direction and conviction on a market-wide basis. Concern that the world’s largest monetary policy groups are backing off lift-giving stimulus and the largest collective economy is destined for a second round of crisis are enough to keep risk off balance. The start of 1Q earnings session or Chinese GDP could tip us over the edge.
 
Euro: As Crisis Concerns Return, True Bear Trend Takes Root
 
The troubles that the eurozone financial sector has faced never really disappeared, they have just been overlooked by speculators comforted enough by short-term fixes to take advantage of higher yields. Over the past week, the majority seems to have come to believe that the next swell in the ongoing tumult is closer than they are comfortable with.

The ECB’s persistent hawkishness, Spain’s nearly-failed bond auction and the surge in periphery sovereign yields spreads sets the tone. Through the coming week, we have relatively few key economic indicators, but that won’t prevent speculation and muckraking, financial journalism. Notable events on the euro docket to watch next week include: Italian bond auctions, Greece employment figures, Spanish housing transactions, eurozone investor confidence and regional inflation reports.
 
Australian Dollar Sensitive To Rate Outlook, Risk Trends, China
 
There is a lot of potential energy behind the financial markets, but the Australian dollar may well be the most sensitive asset out there. There are three very active catalysts that could easily set the currency off. Ever present, underlying risk trends turn the wheel on carry interest. That is particularly concerning for the Aussie dollar given its underperformance to generally level sentiment trends.

Rate expectations tap into the same carry trade interest. And, thanks to the RBA’s dovish comments at its last statement, fear of cuts will only exacerbate the ‘risk off’ theme. Finally, we have the China-effect. If the region’s largest economy slows, so does Australian. That leverages the importance of China’s 1Q GDP data.
 
Swiss Franc: What Are The SNB’s Options?

The SNB has a bit of a problem. They have put their credibility on the line by vowing to keep EUR/CHF above 1.2000, yet the exchange rate has already dipped below the figure and now hovers ominously just above the critical level heading into the new week. It is rumored that the central bank has another €9 billion in orders to keep the market up, but that will be nowhere near enough to block safe haven flows if another wave of crisis fear sweeps over the eurozone.

Officials have a few options of varying effectiveness. The least influential is to simply buy untold levels of euros should it close in on 1.2000. This will passively absorb a lot of losses. Second, they could lift the floor to shake safe haven convictions – though it wouldn’t likely be permanent. The ‘nuclear’ option would be introducing a tax or capital curb, but that is a government decision.
 
Japanese Yen Produces Stand Out Rally, Will BoJ Act Next Week?
 
Price action was generally restrained in the FX market through the final 24 hours of this past week, but the yen bucked liquidity conditions to post an impressive rally. The move was substantial enough to drive USD/JPY to its lowest level in a month as well as force bearish break outs for GBP/JPY, AUD/JPY, CAD/JPY and NZD/JPY congestion patterns through the close. What was pulling the pairs lower? Fear of a risk-off wave. However, the BoJ recognizes the threat. There is a BoJ rate decision next week and the government has been pushing hard for more stimulus.
 
British Pound: Now The Monetary Speculation Really Begins

You would think that speculation of monetary policy would precede an actual rate decision, but for the sterling, it will happen after the BoE announced its decision to hold and remain mum. By the next policy gathering, we will have completed the third round of bond purchases, there will be fresh GDP and inflation figures to work with, and the euro zone could once again find itself in financial straits. Pound traders should keep an eye on euro-area fundamental developments as well as the 10 and 2 year gilt yields.