Dollar Rallies while S&P 500 Retreats, Neither Looks Confident Yet
The Dow Jones FXCM Dollar Index posted its biggest rally since January 30 at the same time that the S&P 500 was rejected the third time this week at the now-ubiquitous 1,850-level. To some, that is a sign of genuine risk aversion. If it is, it isn’t a very convincing sign…yet. For the safe haven currency, the day’s rally was not a record breaker nor have we materially erased the losses suffered through mid-February. Furthermore, the greenback’s performance against individual counterparts through the session was uneven. If we were to lay our sentiment assumptions on the equity index – a more susceptible barometer – the picture is even less persuasive. Though the S&P 500 was rejected from the well-trodden ceiling, the market has yet to tip into a lasting reversal.
In general, the absence of a strong ‘risk appetite’ drive does not mean that we are in turn caught in an intensive ‘risk aversion’ current. Consolidation and indecision are a common median. Yet, given the tightening noose around the US equity indexes, a high profile technical beak is likely due before the end of the week. The burden is translating a volatility event – even one as media-worthy as a stock market breakout – into a systemic shift in market exposure. In terms of ‘probability’, a five-year bull trend for capital markets built on confidence fed by stimulus is more likely to continue. However, for ‘potential’, a forced unwinding of record leverage is far more potent than a wave of new buying interest at record highs and 15-year low participation.
Looking for fundamental fodder for the dollar that doesn’t focus on the bursting seams of risk trends, growth and monetary policy are still topics of merit. This past session, we found the found opposing housing sector readings with January new home sales rising to the fastest pace in five years while mortgage applications for home purchases fell to their lowest level in since 1995 through this past week. Coming up, we have durable goods orders figures for January. Though important, these figures don’t tap the ‘big picture’. Far more interesting will be the monetary policy ruminations. Fed Chair Janet Yellen will finally testify before the Senate today, and other central officials are also set to speak.
Euro Breaks 1.3700 but a Bear Trend Requires a Bigger Push
Perhaps one of the most impressive moves in the FX market Wednesday, EUR/USD finally managed to break a week-and-a-half worth of congestion when it stumbled below 1.3700. Yet, that was a hardly a definitive move. Activity levels (measured by the 10-day average true range) on EUR/USD are at their lowest levels since July 2007. And, given the exceptionally tight band on trading this past week, a short-term breakout was a necessity. To drive the euro to a definitive bear trend, something deeper needs to be stir. That touching point for this second most liquid currency may be the ECB’s monetary policy plans. According to Bloomberg’s survey, six of the 17 participating economists expect some easing of the benchmark rate. Extracurricular policy options are another aspect being floated. Friday’s inflation data will help gauge potential.
Yen Once Again Disagrees with Equity, EM Risk Assessment
Once again, the yen crosses were a sanity check for sentiment diviners working off the failed equity run and dollar rally this past session for their assessment. Where the EUR/JPY and AUD/JPY made mildly provocative moves, the rest of the crosses were holding their ranges. Coming up, we may see the other side of the fundamental scales tip and dislodge the Japanese currency. Conviction in a BoJ stimulus upgrade come April has cooled substantially as of late. With a round of employment, consumption, manufacturing and inflation data; we’ll have a comprehensive view.
British Pound: GDP Unrevised on Unflattering Details, BoE Members Say ‘No Hike’
The updated 4Q UK GDP figures Wednesday offered better detail on where the economy is strengthening and where it is still limping. The 0.7 percent quarterly growth reading was unchanged from the initial report and the annual figure was still at its fastest clip since 1Q 2008. Details showed private consumption cooled more than expected while exports and fixed investment were stronger than initial reported. Meanwhile, BoE officials were on the wires. David Miles and Spencer Dale both remarked that rate hikes are not imminent. That said, neither the sterling nor medium-term Gilt yields (the ‘belly’ of the curve) are capitulating on the built up rate premium.
Australian Dollar Tumbles after Sharp Drop in 4Q Business Investment
While local economic data is important for the Aussie dollar, regular indicators’ ability to alter RBA expectations are typically rather limited. Yet, the 4Q private capital expenditure report from this morning certainly generated heat with a near 45-pip tumble from the AUD/USD after its release. The 5.2 percent drop is the biggest since 3Q 2009 and second largest in 15 years. Aussie 2-year yields plunged 3 percent on the news.
Swiss Franc May Face Breakouts but GDP May Not Provide
Historically, Switzerland’s quarterly GDP report is a tame market-mover. The data doesn’t often deviate far from the market consensus and the preoccupation with the franc’s link to the euro often anchor the currency. That said, a market that is unprepared is one that is more prone to surprises. The report is expected to show 0.4 percent growth on the quarter and 2.0 percent on an annual measure. Watch the EUR/CHF.
Emerging Markets: Brazil Hikes Rates, China Fears Enduring
Interest rates are an important tool for Emerging Markets as it is frequently needed to curb inflation and pinch off capital outflow. Nevertheless, the Brazilian Central Bank’s decision to hike the benchmark rate 25 bp to 10.75 percent didn’t seem to give the Real much of a boost. The market had fully priced in the move. Coming up, the country will release its 4Q growth figures. Meanwhile, the MSCI EM ETF was little changed on the day and most currencies in the group dropped. Keep a close eye on China headlines as talk of trouble boiling to the surface are growing.
Gold Breaks Stride but Silver Suffers Biggest Drop in 4 Weeks
The biggest dollar jump in a month is worth a 0.8 percent slide from gold. The precious metal broke a four-day bull run with its retreat before $1,350. That said, the commodity has not fully turned off its trend. Silver, on the other hand, is in a more precarious position. A sharp 2.8 percent tumble has brought February’s momentum to an abrupt halt and reinstalled $21.50 as resistance.