Dollar Drops Alongside S&P 500 on European Troubles

Dollar Drops Alongside S&P 500 on European Troubles
Euro Troubles Just Starting as Cyprus Issues Drag Out
Japanese Yen: What to Expect in BoJ Power Transition
British Pound: CPI Reading a Precursor to Policy Fireworks Wednesday
Australian Dollar Little Influenced by RBA Rehash
Swiss Franc: SNB Given the Green Light to Halt Eurozone Capital Inflows
Gold Climbs on Cyprus, Ready for BoJ and Fed

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Dollar Drops Alongside S&P 500 on European Troubles
You would think that the occasion of a market-wide financial shock that emanated from the dollar’s primary counterpart (the euro) would be a sure thing for the dollar to rally on. And yet, the greenback fell against most of its counterparts through this week’s opening session. Looking for an alternative to the euro is just one fundamental consideration. The bigger disconnect through ‘normal’ FX reasoning is the greenback’s deviation from basic risk trends. The S&P 500 dropped as much as 1.0 percent and closed 0.6 percent down after an intraday bounce temporarily erased most of the session’s losses. Risk trends are going to be a key component to the greenback’s performance over the next 24 hours – yet the dollar’s roll as a safe haven may not play through unless risk aversion hits a stride. Otherwise, we await the Fed Wednesday…

Euro Troubles Just Starting as Cyprus Issues Drag Out
The world’s top financial headline over the weekend was the unprecedented move policy officials took in fulfilling the Eurozone’s vow to provide Cyprus a rescue last June. Having made the vow that the extraordinary steps taken for Greece (including restructuring debt) were a ‘unique’ exception not to be repeated but considering this even smaller country required a bailout that equaled approximately two-third of total GDP, a creative solution was needed. And, creative they were. Euro-area officials offered €10 billion in aid on the condition that the country would raise another €5.8 billion of its own. The plan to raise that money was to take raise a bank levy on depositors of 6.7 percent on accounts under €100,000 and 9.9 percent over the threshold. However, it became clear Monday that Cyprus’ parliament would not go along with that severely unpopular approach. Since then, the suggestion for keeping accounts under €100,000 untouched has been floated, but the damage is done. Either this effort won’t be passed in any form and Cyprus is left hanging or European see a new precedence to apply to Greece or Spain.

Japanese Yen: What to Expect in BoJ Power TransitionIn direct contrast to the Euro’s painful performance to start the week, the Japanese yen was universally strong through Monday’s session. While pairs like USDJPY, EURJPY and AUDJPY closed the trading day significantly off session lows, the impression was made. The ‘risk reaction’ to the Cyprus headlines seemed to draw out as violent a reaction as US equity indexes – if not more so. What does this tell us about the state of the Japanese currency? Of course, the reaction is a reflection of the yen’s sensitivity to changing risk trends; but it also speaks to unique characteristics. A EURJPY gap of 280 pips is more severe than even news of this magnitude would be expected to muster. This is perhaps a side effect of the lack in speculative participation ahead of the Bank of Japan transition. Governor Shirakawa steps down alongside his two deputy governors today to be replaced by a significantly more ambitious, stimulus-supportive trio. A 25 percent rally like that seen from USDJPY over the past six months no doubt carries some expectation of immediate gratification. Will Kuroda offer it? What if he doesn’t?

British Pound: CPI Reading a Precursor to Policy Fireworks Wednesday
The sterling showed sympathy pains to its troubled trade partner, the Eurozone. Risk sensitive pairings GBPJPY and GBPUSD offered up bearish pound gaps on the open Monday as the waves of fear spread through to the general European Union. However, how much of this was a direct line of fear that the UK could do the same thing to its own citizens? Considering the pound actually gapped higher against the Australian and New Zealand dollar, it is clear the currency was following the lines of risk and not a concern of contentious policy ‘infection’. Moving forward, keeping a close eye on EURGBP can provide a heads up as to the level of the ‘safe haven’ flow looking for protection in the strong regulation and banking guarantees of London’s financial system. Meanwhile, we have more active concerns to worry about. Tuesday brings consumer inflation data (CPI) which shapes the Bank of England’s ability to bolster stimulus. But, the real fireworks are set for Wednesday…

Australian Dollar Little Influenced by RBA Rehash
There was little market adjustment that needed to be made after the release of the Reserve Bank of Australia’s (RBA) minutes or the comments made by various policy officials. In the wrap up of the central bank’s last meeting, we were given the same general guidance offered regularly through previous rate decisions and testimony. Most noteworthy were remarks that there was ‘further scope’ to cut rates should it be necessary and that the Australian dollar was still high given rate cuts. Earlier, RBA Member Debelle noted that capital inflows seeking the yield and safety of Australian government bonds was a dominant factor in the currency’s unrelenting buoyancy. We’ll put that theory to the test tomorrow morning when Australia is scheduled to sell A$600 million in 5.5 percent 2023 government bonds.

Swiss Franc: SNB Given the Green Light to Halt Eurozone Capital Inflows
It is increasingly common that those seeking to flee a specific threat within the Eurozone no longer even make a stop within ‘core’ member economy’s markets. Those looking to move funds out of Cyprus to avoid the country’s depositor ‘wealth tax’ recognize the risk that this unprecedented move to ‘share the costs of a bailout’ could be adopted by other troubled regional players. And, the more systemic the risk becomes the less protection there is markets like Germany, Austria, Luxembourg, etc. The question is will those funds follow old paths towards the Swiss banking system? A floor in the EURCHF is no concern for those seeking harbor. What is a concern is a policy to open the books on tax evaders and negative rates on foreign accounts. The IMF Monday said, the country should use negative rates in such a case.

Gold Climbs on Cyprus, Ready for BoJ and Fed
Our fundamental focus for gold has concentrated on impact that an inevitable stimulus expansion by the Bank of Japan and possible upgrade by the Bank of England can have on the alternative-store-of-wealth. That concern still stands, but the precious metal’s biggest advance in three weeks points us in the direction of something more immediately market moving – namely, the Cyprus debacle. Reviving fears of systemic financial problems in the world’s second largest market is an effective way to drive funds away from the influence of European policy officials (European government bonds, equities, corporate debt, etc). The risk will remain as long as Cyprus is an issue; but to truly transition to a strong gold surge, we should keep an eye on the new BoJ leadership. If stimulus is moved forward, investors will also need an alternative to the yen.
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ECONOMIC DATA

GMT

Currency

Release

Survey

Comments

2:00

CNY

Conference Board China Leading Eco Index (FEB)

Driven by more consumption during Lunar New Year in Feb.

5:00

JPY

Leading Index

96.3

Preliminary reading improved more than current condition; suggesting higher future expectation.

5:00

JPY

Coincident Index