Dollar Threatening Serious Reversal As Dow Index Hits Record High

Though momentum has yet to build, there is a uniform selling pressure setting up behind the US dollar. We see this in the Dow Jones FXCM Dollar Index (USDollar) pullback that threatens to reverse the month-long bull run to 10,500 as well as the EUR/USD stabilizing just above 1.3000. A slip from the greenback should not be surprising considering the favored benchmark for investor sentiment – US equity indexes – made a serious thrust higher this past session. The Dow Jones Industrial Average rocketed to a new record high as investors casted a vote in stimulus (not actual growth). And, while the push lacks for a serious foundation of fundamentals as well as volume, we have learned not to underestimate the power of stimulus. It is follow through that matters, not the breakout; so watch Wednesday risk trends closely.

Australian Dollar Rallies Across the Board on Carry Interest, GDP, RBA
We have absorbed two major pieces of event risk for the Australian dollar this week, and the currency has used the fundamental to drive a meaningful rebound. Though AUD/USD made a turn before the heaviest flow began, the Reserve Bank of Australia (RBA) rate decision and 4Q GDP figures certainly pulled their weight with keeping the currency buoyant. Where the central bank rate decision maintained the threat that there was scope for further easing, there was a notable lack of language to suggest that such a move would be made in the immediate future. The growth report this morning was similarly disarming. While the quarterly GDP report met expectations of 0.6 percent expansion (the previous quarter was revised upwards to 0.7 percent), it nevertheless spoke to more than two decades of expansion without a technical recession. This is data that supports a more dominant theme. Positive risk trends currently takes that mantle, but will it last?

Canadian Dollar: Why the BoC Rate Decision Could Spark Volatility
Most FX traders have become conditioned to expect the Bank of Canada (BoC) monetary policy meetings to be completely overlooked as the authority has not deviated from its path. However, at the past meeting, the steady path towards the prized, eventual rate hike started to flag. We have seen the Canadian dollar drop in the past weeks against its safe haven counterpart (the US dollar) while risk trends have firmed. Overnight swaps are not reflecting an easing policy heading forward, but the sharp drop in the Canadian 10-year government bond yield these past few weeks suggests something is amiss. There is speculation that BoC Governor Carney and crew will drop their commitment to the elusive first rate cut for the majors. If this is indeed realized, it will likely spur further losses for the loonie. Otherwise, shorts have made a misstep.

Japanese Yen Has Flatlined Since Income BoJ Officials Issued Warnings
The ramp for stimulus expectations can’t be driven any higher. Over the past few days, we have heard testimony from Bank of Japan (BoJ) Governor-nominee Kuroda and Deputy Governor-nominees Nakaso and Iwata that was uniformly aggressive in stimulus warnings. With vows to move up the 2014 stimulus program, become more ‘creative’ with stimulus and keeping foreign bond purchases as an option; the outlook for the BoJ effort rivals the biggest player in the mix – the Fed. That said, the yen has gone nowhere through these obvious warnings. Given the positive bearing on risk trends (favorable for short-yen, carry positions), the lack of engagement for the yen crosses is remarkable. This goes a little beyond a simple assumption that the market’s are awaiting action on vowed policy effort. And, Thursday’s BoJ rate decision isn’t the play for it considering the new regime starts with the April 4 meet. Those already short yen will have to bide their time and hope risk doesn’t cave.

Euro Looks Primed for Breakout but Beware the ECB
Both EUR/USD and EUR/JPY have leveled off from the tentative but volatile bearish trends sparked last week. There are two catalysts at play for the Euro – expectations for European Central Bank (ECB) monetary policy and the revival of Euro-area financial risk – and the latter seems to have run short on fuel. Last Monday’s market-wide Euro selloff was driven by news that Italy’s election had ended in a political gridlock. It doesn’t look like a coalition is in the cards with Bersani refusing to deal with Berlusconi and Grillo unwilling to work with either party. Italian President Napolitano reportedly favors a technocrat led government (the same that Mario Monti led), but once again Grillo has vowed not to support such an option. It these avenues fail, the remaining option is a reelection which will take time. This is a mess for Italy and the region, but it is not itself an immediate threat to stability. If we want something kinetic, we likely have to turn monetary policy. Speculation of a dovish turn (discussion of new stimulus or rate cut) from the ECB is building, but it hasn’t shown through in swaps. It may be a wait until Thursday.

British Pound Unresponsive to Strong Services, Retail Sales Data
There was a round of encouraging data to hit the UK docket over the past 25 hours, but it did nothing to help out the sterling. As the GBP/USD’s more-than-1300-pip drop these past two months demonstrates, the market’s heavy primary concern for the pound is that the Bank of England will join the competitive devaluation game and seriously debase the currency moving forward. That is the kind of concern can render indicators showing the biggest jump in retail sales in three years and continued growth in the service sector inert. There is little event risk of note on the docket between now and Thursday’s Bank of England (BoE) rate decision and too much speculation has gone into the assumptions of policy for the market to be sidetracked now. Only a true shift in risk trends can establish a new trend outside of monetary policy’s influence.