Dollar Suffers as Bernanke Sparks Risk Rally, FX War Talk Builds
Euro Winning as ECB Losing the Verbal Intervention Game
Japanese Yen Traders Show Little Reaction to BoJ Nominations
Australian Dollar: RBA Says Currency 4 to 15 Percent Overvalued
British Pound in Fundamental Holding Pattern with Rate Outlook at 5 Month Low
New Zealand Dollar Rallies Early Thursday on Strong Data
Gold Posts First Drop in Five Days as Volatility Settles, Investor Appeal Weighs

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Dollar Suffers as Bernanke Sparks Risk Rally, FX War Talk Builds
US equity markets posted their second biggest rally of the year yesterday, and the safe haven dollar suffered for it…but not as much as would be expected from the risk based move. From the dollar’s various pairings, we witnessed exactly what we would expect from a currency on its specific side of the risk spectrum. The greenback dropped against all of its most liquid counterparts with the exception of the Japanese yen – as far as USDJPY (and the other yen crosses) has moved, the dollar is set as the defacto ‘investment’ currency in that pairing. However, despite the broad-based advance; the biggest dollar drop was the 0.6 percent slide versus the Euro. Offering a similar evaluation of the situation, the Dow Jones FXCM Dollar Index (ticker = USDollar) posted a mild 0.1 percent decline that ended a five-day climb without fully turning trend.

Where was the disconnect between the capital market’s favored risk measure (US equity indexes) and the FX market’s preferred safe haven (US dollar). Both the S&P 500 and Dow Jones Industrial Average rallied 1.3 percent through the past session, and the latter closed at a new five-year high. Yet, the dollar was barely moved. In fact, other safe havens were similarly restrained in their performance. The yen crosses advanced only between 0.3 and 0.6 percent, the US 10-year Treasury (the undisputed safety assets for high finance) yield rose less than 2 basis points and gold dropped for the first time in 5 days. That stand out in this scenario is US equities.

Looking at the fundamental encouragement that backed the day’s performance, we find a rather lackluster foundation for market strength. The risk shift began during the time the housing data and initial comments from Fed Chairman Ben Benarnke crosses the wires. A 4.5 percent rise in pending home sales is good, but hardly a systemic driver for sentiment. Remarks focused on ‘life-giving’ stimulus, though, taps into exactly the vein the market has come to depend on. Though the second day of Congressional testimony from the central banker, the market responded to comments that the FOMC majority supported current stimulus efforts – a contrast to the minutes which found a foothold in questioning stimulus. Alternatively, the Chairman also said that they would be reviewing exit strategies ‘soon’ – conveniently overlooked. Looking for further fuel for a risk trend (for or against), we will have the Treasuries report of foreign holdings of US assets and then Friday is the Sequester deadline. Meanwhile, keep an eye on the growing trend of verbal intervention. Fed stimulus is anchored; others catching up is therefore dollar bullish.

Euro Winning as ECB Losing the Verbal Intervention Game
On a risk-positive session, the Euro was the best performer on the day Wednesday. The docket carried consumer sentiment figures and the ECB’s 3-month refinancing tender (measuring European banks’ demand for short-term funds as a measure of financial market strain). Neither was particularly remarkable as catalysts. Perhaps the most novel headline the past session was ECB President Draghi’ssuggestion that the central bank would not starting working down its stimulus effort any time soon – rather weak on the verbal intervention front. As for the biggest headline for the week – the Italian election – the situation is discouraging between either a grand coalition (which Beppe Grillo is loudly against) or reelection. Moody’s says the situation is credit negative, but it lacks for urgency. Germany jobs figures tomorrow though…

Japanese Yen Traders Show Little Reaction to BoJ NominationsYen crosses climbed through Wednesday and carried forward the bid into the early hours of today’s session. The advance was largely founded on the positive sentiment move read in equities and other carry-based interest across the market. The big news this morning – the governmentnomination for BoJ Governor and Deputy Governors – on the other hand was fully lacking for impact. That shouldn’t surprise as we knew the income officials would be dovish – but after weekend gap on media-led speculation of the candidates, it was better to be safe than sorry. Officials (government and central bank) took the occasion to reiterate their commitment to ‘end deflation’ – which interestingly enough has a side effect of lowering the yen. Now with the doves in place, the yen crosses need an active catalyst to rally the funding currency…risk aversion.

Australian Dollar: RBA Says Currency 4 to 15 Percent Overvalued
We haven’t seen the Reserve Bank of Australia (RBA) engage to heavily in the verbal intervention game…until today. The central bank released research that showed up to 34 banks could be holding the high-yield currency in reserves – not surprising given the IMF’s consideration of the currency for reserve status. However, the statement went on to suggest that the Aussie dollar could be between 4 and 15 percent overvalued. So much for not giving currency guidance. That said, AUDUSD and other crosses did not drop back on the warning.

British Pound in Fundamental Holding Pattern with Rate Outlook at 5 Month Low
Currencies are most susceptible to monetary policy changes at the very beginning of the shift. That is why the British pound has been so volatile on rather restrained evidence that an easing approach may be on the horizon. How far the pound tumbles depends on how far expectations will drop. The sterling has adjusted significantly, but 10-year gilt yields continue to drop and the 12-month BoE rate outlook just hit a 5-month low…

New Zealand Dollar Rallies Early Thursday on Strong Data
Already hopped up on risk-based volatility, the New Zealand dollar extended its abrupt price movements this morning with the help of event risk. The headlines held Finance Minister English comments that supported the RBNZ’s dovish shift, but it was the data that seemed to carry more weight. Business confidence figures for February jumped to July 2011 highs, but hardly the kind of event that turns yield expectations.

Gold Posts First Drop in Five Days as Volatility Settles, Investor Appeal Weighs
Following a four-day advance that capitalized on rising volatility (risk) in the FX market, gold finally put in for a down day Wednesday. The slip is to be expected if the market has been boosting the metal on the basis that unstable exchange rates undermines the appeal of fiat money as the FX Volatility Index slipped alongside the VIX. That said, the continued drop in ETP (Exchange Traded Products) gold holdings as well as the collapse in net speculative interest in gold futures (COT) still set the medium-term fundamental trend.
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