Dollar Holds 10,500 and its Bull Trend as Dow Breaks 16-Year Record

Dollar Holds 10,500 and its Bull Trend as Dow Breaks 16-Year Record
Euro Tumbles on Italian Risk Flare Up, EU Members Meet Thursday
New Zealand Dollar Tumbles after RBNZ Hints at Rate Cuts
Australia Dollar Soars after Strong Employment Data Report
Swiss Franc: Should We Expect Volatility on the SNB?
British Pound: BoE Quarterly Bulletin Notes Pound Drop
Gold Rebound Cut Short As Dollar Stabilizes, Volume Never Materializes

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Dollar Holds 10,500 and its Bull Trend as Dow Breaks 16-Year Record
It seems the Dow Jones FXCM Dollar (ticker = USDollar) will extend its record for avoiding a three-day consecutive decline beyond the three-month mark. The greenback advanced against most of the majors this past session – despite the persistence of stimulus-supported risk trends in the equity market – and has upheld its impressive aggregate bull trend. However, this advance looks more and more dubious with each day against the backdrop of strong performance in other ‘risky’ asset classes. If investor appetite for yield continues to build, the greenback will eventually fold to its safe haven status (which is still prominent in pairings like EURUSD, NZDUSD, AUDUSD). That said, a market-wide risk aversion move could forestall judgment. With the Dow stock index postings its longest rally in 16 yearson fadingvolume, the risk is palpable.

Euro Tumbles on Italian Risk Flare Up, EU Members Meet Thursday
Of the two dominant and competing fundamental themes for the euro – the ECB’s stimulus reduction and risk of a revived financial crisis – a modest tip in the scales was seen with Italy and Greece this past session. While the weekly LTRO repayments continue to shrink the central bank’s balance sheet and slowly buoy market rates, the risk of a financial rift opening again is more volatile a risk – and it has many fuses. In the headlines this past session, Five Star Movement party leader Beppe Grillo remarked that Italy was already essentially out of the common currency and would be unceremoniously dropped when its debts were repaid. Thought his may be bluster, it reminds us that a coalition government is unlikely in Italy – and the country’s poor bond auction shows that realized risk. Meanwhile, the Greece and Troikameeting on the former’s next aid payment broke without a resolution. It seems the country won’t be paid its support this month. Some encouragement is found in Ireland’s first bond auction since its own rescue and potential Spain’s long-term duration auction today, but keep an eye on the EU summit.

New Zealand Dollar Tumbles after RBNZ Hints at Rate CutsFX traders have grown increasingly sensitive to monetary policy efforts – and well they should as we seem to be the middle of a ‘silent’ currency wary. Most of the focus has fallen on the countries were rates are already at extreme lows and open stimulus programs have had to supplement further easing (Fed, BoJ and BoE). However, the upper end of the yield curve matters just as much as the low end. The global wave of stimulus is aimed at absolving investors’ risk and encourage investment – for the FX that means carry trade – but return still matters in this low implied volatility world. New Zealand’s benchmark rate is already at historical lows, but the latent hope of a hike somewhere in the undefined future kept kiwi bulls on the fence. Well, Reserve Bank of New Zealand (RBNZ) Governor Wheeler snuffed out that hope for higher yields this morning. He stated clearly that he expects rates to be held through 2013, though a high currency left the door open to easing should it be needed.

Australia Dollar Soars after Strong Employment Data Report
While some currencies and pairs have made tentative moves towards reversals or breakouts, the Australian dollar has seen a brash swell in volatility through the opening hours of this new trading session. The catalyst is easy to pin point: a remarkably strong showing in February employment data. The 71,500 jobs added to the economy represents the biggest jump since July 2000 – significant enough to override doubt that may arise from the reality that most of those positions (53,700) were part time. Furthermore, the jobless rate unexpectedly held at 5.4 percent while participation jumped to 65.3 percent. This is a strong economic readings, but we shouldn’t expect it to be a ‘game changer’. This figure – along with the uptick in CPI estimates – will ease rate cut expectations, but those weren’t particularly egregious to begin with.

Swiss Franc: Should We Expect Volatility on the SNB?
The performance for the franc mirrored that of the Euro. The Swiss currency dropped against all counterparts with the exception of the New Zealand dollar. The slow creep of ‘tail risk’ back into the Eurozone infects the European currency, but fundamental correlation between it and the franc means that one continues to lead the other. Should we expect this relationship to diverge or perhaps even temporary bend in the upcoming trading session with the Swiss National Bank (SNB) scheduled to deliberate on monetary policy? It is unlikely we will see a material change in the policy group’s longer-term policy approach (commitment to keep EURCHF above 1.2000 at all costs while targeting inflation and economic activity). Even short-term volatility is likely to be modest in the wake of the event if history is to be any guide. The market has come to expect President Jordan and crew’s volatile remarks regarding the high franc. Outside of that warning, little more has been pursued.

British Pound: BoE Quarterly Bulletin Notes Pound Drop
The sterling was notably higher against all of its major pairings this past session, but momentum was a luxury the currency was unable to find outside of moves that took advantage of weakened counterparts (GBPNZD, EURGBP). The economic docket was light Wednesday with no major releases on hand. Meanwhile, 10-year gilt yields stumbled back below 2.00 percent, while the 12-month interest rate outlook – measured through swaps – offered little relief. The best means for sparking a pound rally is to establish a fundamental drive. Early in Thursday’s trading session, we had the Bank of England’s (BoE) 1Q bulletin. Though relatively light on big ticket items (like rate guidance), the report did note that market sentiment seemed ‘significantly improved’ and made mention of the ‘particularly large’ drop for the currency. The group wrote off the remarkable pace by suggesting other havens had also dropped, and that it could be a factor of the economic outlook and rating downgrade.

Gold Rebound Cut Short As Dollar Stabilizes, Volume Never Materializes
A promising breakout by gold Tuesday fell apart just as quickly as it started this past session. A 0.3 percent correction from the precious metal is a modest shift and fits the general pace of tepid daily changes we have seen since the month began. As for the failed rally, a lack of follow through was a product of fundamentals – or lack thereof. The precious metal has found itself under heavy selling pressure by ETFs (holdings have dropped over 6 percent since the peak in late December) and speculators in the futures market (net long positioning is just off a four year low set last month). We need demand to offset this unwinding by historically committed parties. A serious trend would develop alongside a renewed swell in global stimulus levels – a matter of time as the BoJ steps up – while a ‘cheap’ rally would come from a dollar tumble.
**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar
ECONOMIC DATA

GMT

Currency

Release

Survey

Comments

0:00

AUD

Consumer Inflation Expectation

2.2%

Within its target of 2-3%; low inflation may prompt rate cut.

CNY

Actual FDI (YoY)

-4.8%

-7.3%

2Y downtrend; companies stay cautious amid inflationary concern

0:30

AUD

Employment Change

10.0K

10.4K

Unemployment rate returned to 10/12’s level, while full time participation decreased and part time participation increased substantially; Implying disposable income will not rise proportionally.