Talking Points:

Dollar Bounces Along with Yields, CPI a Key Benchmark
British Pound Bulls Fear Weaker Inflation Statistics
Euro Takes Another Hit as ECB’s Threats Pick Up Intensity

Dollar Bounces Along with Yields, CPI a Key Benchmark
US equities may have put up a decent rebound to open the week, but that wouldn’t stop the dollar from doing the same. The S&P 500 jumped 0.8 percent Monday while the Dow Jones Industrial Average (ticker = USDollar) climbed 0.1 percent itself. A simultaneous rise from the benchmark risk measure and a currency normally relegated to its liquidity status is not particularly surprising, however, as we have seen the greenback draw more of its bearings from yield forecasts than traditional sentiment tides as of late. As it happens, the two-year Treasury yield rose 3.4 percent to 0.367 percent on the same day to help put the fire out of the past two week’s tumble in FOMC speculation. If this bounce is to forge new progress, the upcoming CPI release will have to play its part. Evan a mid-2015 hike needs some nascent inflation pressure.

British Pound Bulls Fear Weaker Inflation Statistics
Like the dollar, the sterling faces a key inflation update in the upcoming session. Price readings from the consumer, retail, factory and housing sectors are all due at 8:30 GMT. In comparison to the US inflation data, though the UK data weighs in on a far more contentious interest rate backdrop. Where the market is trying to find a grounding for whether the Fed will be prompted to move on rates in the first or second half of 2015, the view seems pretty clear on the Bank of England. There is a significant expectation that the BoE will hike its benchmark lending rate for the first time by the opening three months of 2015. That would mark the most hawkish of the major central banks – with the exception of the RBNZ – and it is without doubt a key source of the sterling’s strength this past 9 months. Yet what is a boon can quickly turn into a burden. Given the hawkish consensus, the impact of a ‘disappointing’ CPI read could prove particularly heavy on the pound.

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Euro Takes Another Hit as ECB’s Threats Pick Up Intensity
European monetary policy makers are trying their best to strong arm the Euro lower without having to actually resort to monetary policy. EURUSD opened the week more than 40 pips lower than were it close Friday – the biggest weekend drop in 13 months – following remarks delivered by ECB President Draghi. Back on March 13, the central banker took the step to link the exchange rate to monetary policy by suggesting an expensive euro contributed to deflation. The remark kept EURUSD from hitting 1.4000, but the pair really turned a week later because of the Fed. With the recent charge back to 1.3900, Draghi felt he had to up his game. The central banker said “the strengthening of the exchange rate requires further monetary stimulus”. We’ve heard plenty of warnings that they could be provoked or it was only a matter of time that more stimulus is on the way, but this is as explicit as we’ve seen. The question is – does the market believe them?

Yen Crosses Sluggish to Rebound with Nikkei 225, Risk
Though Japanese equity markets were off to a slow start Monday, the Nikkei 225 futures were playing catch up to US and European shares by rising 0.6 percent through early trade Tuesday. The traditional barometer for speculative appetite was materially higher, but the move smacked of weak conviction. The same was true of the yen-funded carry trade. Most of the yen crosses ranged between a 0.2 percent gain or equivalent loss. Given the weight of major support on these pairs (like 101 for USDJPY), investors are more insistent on a fundamental driver for progress.

New Zealand Dollar: Steady Rate Hikes Needs Inflation Backing
In the monetary policy ranks, the New Zealand dollar is at the very upper end of the perception curve – and for good reason. The Reserve Bank of New Zealand (RBNZ) was the first developed world central bank to hike its rate at its last meeting; and the authority remains very vocal about its intentions to carry on with further tightening over the next two years. Yet, as loudly as the central bank’s threats are, policy is still dictated by data. And, nothing is more important to rate setting that inflation. That makes the upcoming 1Q CPI reading for New Zealand particularly important. It is difficult to ‘surprise’ to the upside, but bulls born from hawkish expectations could be seriously taken aback by soft data.

Chinese Yuan Hits Fresh 13-Month Low Heading into 1Q GDP Data
USDCNH jumped 0.2 percent Monday and is up for the fifth consecutive session in early Tuesday trade. The consistency in the run is perhaps less impressive than the market’s overall level. With this week’s sustained drive, the exchange rate cleared nearly a month’s worth of resistance around 6.2150-2200 and nowtrades at 13-month highs. A heavy run of event risk meanwhile has already started. This morning, the government reported new lending in March grew more than expect to 1.05 trillion yuan while foreign reserves hit a record $3.95 trillion. The immediate impact was moderate though as the market readied for Wednesday’s 1Q GDP release amid calls for more stimulus.

Emerging Market Currencies Slip Lead by Ruble’s Ukraine Troubles
A further deviation between the picture equities painted Monday and the broader assessment of ‘risk trends’ was the lackluster performance of the Emerging Market set. From the MSCI Emerging Market ETF, a 0.2 percent slip was backed by the third weakest hand in trading volume this year. Meanwhile, JPMorgan’s EM volatility index advanced for a fourth consecutive day to 8.4 percent (still substantially off the March peak 9.3 vols and 2014 high of 10.5 vols on January 30). Looking at the FX performance for the group, the vast majority of the EM currencies were moved lower Monday. Leading the way was the Russian Ruble’s 0.8 percent tumble as the US and Eurozone threatened further sanctions over Ukraine. US President Obama and Russian President Putin reportedly spoke on the country’s turmoil, but little progress was reported.

Gold Advances to Three-Week High After COT Shows Three-Week Drop in Speculative Holdings
Despite a rebound in equities (for risk trends) and a further bounce from the US dollar, spot gold still managed a 0.7 percent climb Monday to push the metal back to $1,328. Looking at the commodity’s performance against various currencies, it comes as little surprise that the biggest jump on the day was associated with the Euro. The threat of stimulus – regardless of the catalyst – will provide a material source of demand for a non-fiat asset. On a broader basis, the general drop in the majors’ benchmark yields (10-year government bond) to the cusp of an 8-month low further weakens the argument against holding a physical asset that suffers from a lack of traditional return. That said, the speculative demand that was the metal’s primary source of strength has significantly eroded as of last. The CFTC’s Commitment of Traders data shows that net long speculative holdings of gold futures have dropped an impressive 35 percent in just the past three weeks.
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ECONOMIC DATA

GMT

Currency

Release

Survey

Comments

4:00

JPY

Tokyo Condominium Sales (YoY) (MAR)

-24.1%

Since the expansion of the BoJ’s QE program in 2013, Japanese Business Confidence and Capital Spending have been have risen considerably, evident in the steady upward progression of the Japanese Machine Tool Orders Index

6:00

JPY

Machine Tool Orders (YoY) (MAR F)

41.8%