Forex: Dollar Attempts First 4 Day Rally in 3 Months, CPI Ahead

Talking Points:

Dollar Attempts First 4 Day Rally in 3 Months, CPI Ahead
British Pound Rate Outlook Deflating Quickly After Jobless Uptick
Yen Crosses: A Steadfast BoJ Doesn’t Bode Well for Record Trade Deficits

Dollar Attempts First 4 Day Rally in 3 Months, CPI Ahead
Two very potent fundamental themes are starting to throw their weight behind the dollar’s recovery. Yet, to mount enough strength to force a EURUSD, GBPUSD or AUDUSD reversal; these catalysts need to hit a fundamental stride we have not seen in the past weeks. In the meantime, the greenback has nevertheless managed a broad – albeit tepid – advance. In fact, its gains against the Euro and British pound were more technical than qualitative. That is the same impression we draw from the Dow Jones FXCM Dollar Index’s (ticker = USDollar) 21 point cumulative gains through the first half of the week.

Moving forward, risk trends – as per usual – represent the greatest opportunity for the benchmark currency. The S&P 500, having exhausted its recovery before overtaking last month’s record highs around 1,850, dropped 0.7 percent this past session. Given the weak participation and the constant second-guessing on the equity index’s climb, this correction can build into fear rather easily. This past session, the IMF’s warnings that the recovery is still weak and exposed to “significant downside risks” struck the right, discouraging tone to concern stock traders and feed the dollar’s safe haven status. In measuring the amplitude of ‘fear’, traders should keep an eye on volatility measures. The equity-based VIX jumped 1.6 ‘vols’ this past session off monthly lows. A more significant FX volatility response (it was barely changed) is crucial for the dollar.

While waiting patiently for a definitive sentiment catalyst – bullish or bearish – dollar traders will also have to keep an eye on US-based monetary policy expectations. The currency has generated limited strength from the FOMC’s two Taper moves thus far, but the market is slowly resigning itself to the reality that QE3 will fully be wound down perhaps as early as September, and speculation of a rate hike will swell before that fateful day. This past session, Fed speakers and the FOMC minutes reinforced this bearing. Thursday’s CPI may further offer its stamp.

British Pound Rate Outlook Deflating Quickly After Jobless Uptick
The second round of important, monetary policy-related event risk was released from the UK docket this past session; and the outcome was notably pound negative. Building on the slide in the consumer-level inflation (CPI) figure from Tuesday – below the BoE’s 2.0 percent target for the first time since November 2008 – the ILO unemployment rate ticked up. It was the sharp drop in this particular labor series that had generated so much strength through January as the market interpreted the central bank’s ‘7.0 percent target before considering rate hikes’ in an extremely literal sense. With the BoE backing away from these explicit targets last week and now the jobless rate ticking up, concern that rate expectations have run too far is growing. If the 2-year UK government bond yields continue to retreat, the pound will follow.

Yen Crosses: A Steadfast BoJ Doesn’t Bode Well for Record Trade Deficits
A uniform advance from the yen against the majors this past session reflects the slow turn in risk trends we have seen in other markets. And, this drive seems to be already gathering a head of steam. Already, the funding currency is showing larger gains early in Thursday’s session than what it wrenched in the previous trading day. Do nothing to correct this unwelcome (from a policy official’s standpoint) development, the January trade statistics this morning offered little respite. The unadjusted deficit doubled to ¥2.79 trillion – the largest on record.

Euro Faces Tests on Economic and Financial Health Thursday
There was relatively little on the Euro newswires this past session, but the IMF made a point of highlighting that the regional economy was “turning the corner” with a fragile recovery. Moving forward, the event risk fills out with two particular highlights. Offering a tangible and direct update, the February Eurozone PMI figures are a timely GDP proxy to test the IMF’s and market’s dubiousness. Perhaps not as volatility-inducing – but arguably just as influential – Spain is planning auction sell 5, 10 and 30-year bonds. There is no better test of confidence.

Canadian Dollar Rebound Fails, USDCAD Soars
So much for the loonie recovery effort. The Canadian dollar was the biggest mover on the day Wednesday with a drop that ranged between 0.8 and 1.3 percent (NZDCAD and CADJPY respectively). There was certainly a ‘risk’ element to the faux carry currency’s stumble, but the day’s data seemed to proffer more than its fair share of influence. Wholesale Trade Sales marked its fourth largest drop in five years.

New Zealand Dollar: PPI Another Blow to Rate Forecasts
Though a March rate hike from the RBNZ is still fully priced in by the swaps and FX market, that is not what will lead the Kiwi’s next move. The first hike is fully expected and thereby fully priced in. Further gains from the currency on the basis of yield forecasts means building on expectations of subsequent hikes. The drop from the 4Q factory-level inflation report (PPI) this past session does little to set that pace.

Emerging Markets Come Under Real Selling Pressure
In the IMF’s (International Monetary Fund) staff report for the upcoming finance minister and central bankers meeting, the group made specific mention of potential trouble in the Emerging Markets. According to the group, prolonged turmoil on capital outflow and higher interest rates for the risky economic category could generate deeper problems for the global financial system. In response, the MSCI Emerging Market ETF dropped 0.7 percent (to $39.02) on a sharp increase in volume. Leading the currency response were some of the most risk-sensitive: the South African Rand dropped 1.5 percent, Hungarian Forint fell 1.2 percent and Russian Ruble slipped 0.6 percent.

Gold Posts First Back-to-Back Decline Since Late January
A rebound for the dollar and continued talk of moderating monetary accommodation this past session led spot gold to a 0.8 percent decline (to $1,311) Wednesday for the first back-to-back decline since January 27-28. Despite the decline, the metal is still well above its 200-day moving average and the round $1,300-figure. Furthermore, volume on this slip was still light in ETFs and futures, while the CBOE’s volatility index has yet to price in disaster. Yet, further developments along the fundamental lines we have seen lately can cause bulls indigestion. If the upcoming US CPI data helps escalate the Taper conversation to pricing in the eventual, first Fed hike; selling momentum make build.
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ECONOMIC DATA

GMT

Currency

Release

Survey

Comments

0:00

NZD

ANZ Consumer Confidence Index (FEB)

135.8

As the Kiwi remains at major resistance, data this and next week out of New Zealand may have a larger impact on price action.

0:00

NZD

ANZ Consumer Confidence (MoM) (FEB)

4.9%