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Currencies AUD Dollar Retreats as Rate Outlook Outguns Risk Aversion

Talking Points:

  • Dollar Retreats as Rate Outlook Outguns Risk Aversion
  • Yen Crosses Face Inflation Data Tomorrow, Tax Hike Next Week
  • Euro: Officials Making a More Obvious Bid to Talk Down Currency

Dollar Retreats as Rate Outlook Outguns Risk Aversion
The Dow Jones FXCM Dollar Index (ticker = USDollar) has dropped for four consecutive days and is now working on its fifth – matching its lowest stumble in six months. For some, this performance is a surprise given the retreat in equity markets – as a proxy for ‘risk’ – this past session. In general, the frequency with which reports of legitimate financial market outbreaks are showing up in global headlines (China shadow banking, China economic slowdown, forecasts of a deep Russian recession, suspiciously low Eurozone lending rates, Fed Taper implications, et) should serve as a warning that the market’s ability to view these as discrete occurrences is winding down. Yet, until the shift from speculative build up – other’s call it ‘yield chase’ – to deleveraging is marked, dollar traders can afford to be complacent on this front. That leaves the active change in yield forecasts as a more proactive driver. While the 2-year Treasury yield continues to push higher as rate watchers price in the early influences of the Fed’s first moves, the subsequent hawkish trend is slow to develop.

Yen Crosses Face Inflation Data Tomorrow, Tax Hike Next Week
Comparing the USDJPY and other yen crosses now to where we were a year ago, we can see the dramatic difference in market bearing. In the lead up to last April’s BoJ meetings, the Japanese currency was pitched into an aggressive and consistent decline. If we were to assign an descriptor to the markets now, it would have to be ‘directionless’. The market’s expectations / hopes that the central bank was due to upgrade its open-ended stimulus program that it introduced nearly a year ago has certainly faded. And, in the absence more manipulation, risk appetite is not offering a motivated alternative. Stimulus expectations will be shaped tomorrow by CPI data, next week by a planned tax hike.

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Euro: Officials Making a More Obvious Bid to Talk Down Currency
It is difficult to miss. The ECB is making a concerted effort to verbally talk the euro down. Following up on President Draghi’s link between a high exchange rate and deflation, we have heard related comments from the likes of Weidmann, Makuch, LInde and others. However, as many policy officials have found out the hard way, the market cares about action – not musings. And, the global search for yield is keeping European assets and the currency bid. Record or multi-year lows in Spanish, Italian, and Greek yields reflects a shift from returning capital to speculative inflow.

British Pound: Rate Forecasts Refuse to Retreat, So Does Sterling
GBPUSD advanced for a third consecutive day through Wednesday’s close. While the sterling has gained against most of its counterparts over the past session, this particular pair stands out for its focus on the relative monetary policy outlook. Where the Fed is engaging in Taper and the market is working on its consensus for the timetable of the first rate hike, the pound maintains its buoyancy against the benchmark. Though a rough and certainly imperfect measure, we can use the cable’s stubborn hold above 1.6500 as evidence that the projected timing of the Bank of England’s return to a rate hike regime is nearer than its US counterpart. A more quantitative assessment would be the relative level of the UK-US two-year yield spread which is still hovering near two-and-a-half year highs. When rate hike hopes fall, the pound bears will step in.

New Zealand Dollar’s Next Bull Leg Held Up By Market Rates
The New Zealand dollar has certainly gained ground since the RBNZ hiked rates for the first time in what is expected to be a hawkish regime. Yet, the progress is not what most would expect from a currency that stands to dominate the yield curve for some time to come. The difficulty for establishing how much ground the kiwi ‘should’ gain from this change in fundamental standing depends on how much was priced in before the official move. When we look at market-based rates, we can generally see that markets had priced in at least the first hike well in advance. Looking at the 10-year New Zealand government bond yield, we have been unable to overtake 4.65; and it is currently retreating.

Australian Dollar Building Strength as RBA’s Concern Overlooked
A universal advance for the Australian dollar this past session speaks to concentrated strength. The often unloved currency has gained enough traction to win substantial technical breakouts and progress from AUDUSD, EURAUD and even AUDNZD. In the absence of a strong risk-based run and given the gains versus its higher-yielding counterpart (the kiwi dollar), this is more likely a factor of improved rate forecasts for the Aussie. Indeed, we have seen expectations of another RBA rate cut (or cuts) this year dissipate substantially over the past few months. The shift from a dovish to neutral position can have more bullish influence and longer pull for a currency than an actual rate cut itself. That is proving a problem for the central bank which has regularly lamented an ‘overvalued’ currency. Markets respond to returns rather than ruminations.

Emerging Markets: A Ukraine Economic Evaluation and Aid Thursday?
Emerging markets offered up a mixed performance this past session. There was a clear split in performance for the list of currencies (the Lira, Peso and Real up while the Peso, Forint and Rupiah dropped) that further detracts from a clear ‘risk’ bearing for the broader financial markets. Meanwhile, the MSCI’s Emerging Market ETF offered up another bullish gap to two-month highs on Wednesday’s open before retreating into the close. For standout developments, the Ukraine-Russia situation still crowds out the headlines. The World Bank released a projection that Russia could suffer a 1.8 percent economic contraction in 2014 due to sanctions imposed in response to the Crimea adoption. Given the $70 billion capital outflow that may be realized in 1Q according to Russian officials, this could prove a catalyst for the broader EM group. Ahead, we have a Ukraine economic survey from Bloomberg and South Africa’s central bank rate decision.

Gold Closes in on $1,300, 200-Day Moving Average and Bearish Confirmation
Though momentum has been trimmed, gold is still tracing out a bearish trend. The magnitude of the 0.5 percent slip this past session isn’t nearly important to traders as the relative position we now find the metal in. At $1,305, gold is at the door step of a round number it took months to overtake and the widely watched 200-day moving average. The impetus for gold tumble seems innate. Despite unsteady risk considerations and the stumble from the dollar, themetal’s retreat persists against all the major currencies and even the emerging market set. Looking at the 10-day average volume behind the SPDR Gold ETF, we are seeing the heaviest turnover since December 20 (before the turn). Furthermore, COMEX futures open interest – a timely aspect of the COT speculative build up – is dropping quickly from last week’s 8-month high.





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