Talking points:

• Dollar Retreats as Bulls Look for New Driver
• British Pound Top Volatility Risk on February CPI Release
• Australian Dollar Advances Despite Risk Slump, Weak Chinese Data

Dollar Retreats as Bulls Look for New Driver
It doesn’t seem like a more timely interest rate outlook for the US is going to be able to carry the dollar to new highs all by itself. Though the market is still processing the FOMC rate decision last week – complete with Taper, robust forecasts and a forward shifting rate forecast – the currency itself was back on the defensive to start this week. Though the 0.2 percent slip from the Dow Jones FXCM Dollar Index (ticker = USDollar) was mild, the breadth of the weakness was remarkable. The benchmark dollar dropped against all of its major counterparts. Though rate forecasts carry substantial weight for the FX market at this stage of the global yield cycle, the timeline is still too vague and differentiation from its major counterparts (ECB, BoE, etc) too subtle to charge lasting trends. We need something more.

The opening session’s economic headlines offered a mixed picture of the ‘first half Fed rate hike’ discussion. For data, the Chicago Fed’s February National Activity Index returned to positive territory as 54 of the 85 monthly components improved. Meanwhile, Markit’s manufacturing activity index for the current month cooled more than expected from the previous month, but was still soundly in growth territory with its second best showing in 15 months. Two year Treasury yields – a good maturity to gauge rate expectations over the time frame we looking at – rose to a six-month high. Ahead, we have the Conference Board’s consumer confidence survey, new home sales and two Fed speakers (Lockhart and Plosser who will both speak on the economy).

Yet, active calendar aside, the greenback’s best hope for sustained volatility and trend rests with more elemental considerations. We have not seen a genuine risk aversion wave hit the market in months and speculative appetites are building a tolerance to theatrical headlines. The Ukrainestandoff, a definitive global shift away from uncapped stimulus and cooler developed world growth readings are being met with a shrug.

British Pound Top Volatility Risk on February CPI Release
This is a dangerous position for the sterling to find itself in before significant event risk. Where GBPUSD has already slipped the floor of its advancing trend from this past summer, GBPJPY stands at the very cusp of turning its 18-month bull trend and GBPAUD risks full collapse on a near-5000 pip bull trend. The calendar item in question is the February consumer inflation (CPI) report due to cross the wires at 9:30 GMT. In this indicator, we find the true measure as to whether rate hikes are needed or not. Where unemployment can drive the Bank of England to loosen policy, an improvement does not necessarily require the group to rein it in. That comes with a rise in price pressures.

According to Bloomberg’s consensus of economists’ forecasts, headline CPI is expected to cool further to a 1.7 percent annual clip. That would push the indicator to its lowest reading since October 2009 – and further drive the inflation benchmark below the BoE’s 2.0 percent target level. For FX and gilt traders, that would translate into further delay for the return to rate hikes. The two-year UK government bond yield this past week tagged a two-and-a-half year high of 0.723 percent and is currently at 0.650 percent. Should price pressures wane, it could seriously impede rate forecasts, deflate UK yield premiums and send the sterling into retreat.

Australian Dollar Advances Despite Risk Slump, Weak Chinese Data
There was little that should have impressed Aussie bulls Monday, but the currency found its way higher nonetheless. Risk trends – led by equities – weighed on appetites for thin carry trade; and the flash reading of the HSBC’s China manufacturing PMI for March unexpectedly dropped to its lowest level in 8 months. Nevertheless, the AUD advanced against all major counterparts. The question is, ‘can it last’…

Euro Posts Strong Rally Well After Regional Data
The leveraged a universal rally Monday that drove EURUSD 90 pips higher in the span of less than an hour. Given the data on the economic calendar and the commentary crossing the wires from officials, the move may seem justified. The only concern is that the move happened well after the fundamentals were released and incorporated. A popular explanation is confidence that Russian sanctions will not amount to economic hardship and won’t escalate further; but this is more likely the work of natural capital flows by a motivated buyer and momentum players.

Japanese Yen Crosses Tension Building as Technical Boundaries Close In
Ranges are a common site amongst the Japanese Yen crosses. Most of these pairs have carved out 100 to 200 pip ranges over the past few weeks have slowly stalked the boundaries is slow, ominous cycles. With a one-month expected volatility reading on USDJPY plunging lows not seen in 16 months – before the incredible climb for these pairs – tension will no doubt lead us to a break sooner rather than later.

Swiss Franc Unfazed by IMF’s Suggestion to SNB for Negative Rates
In the IMF’s Article IV Consultation for Switzerland released Monday, the group repeated its suggestion of an accommodative policy stance for the Swiss National Bank (SNB). The group suggested the central bank consider charging interest on excess reserves (negative interest rates) should the franc continue to appreciate. According to the report’s lead, the currency is currently 5 to 10 percent overvalued.

Emerging Markets: Brazil Downgraded and Russia Faces Capital Outflow
Even before the last-minute rebound in equity markets and retreat in volatility pressures, the emerging markets were doing well. The MSCI Emerging Market ETF rose 1 percent on tempered volume and the majority of currencies under the classification gained. This performance further confounds Brazil being downgraded by S&P, Russia seeing an estimated $70 billion in 1Q outflows and weak Chinese data.

Gold Shrugs Off Friday Rebound, Extends Tumble
Spot gold crashed 1.9 percent to open this week – the biggest single day loss in three months and the fourth time in the past five trading days we have seen red. This performance isn’t particularly surprising on the risk front as the commodity has maintained a questionable relationship to that role. Yet, the dollar’s retreat does present an unusual contrast. Gold has dropped as much as 6 percent ($85) since last week.**Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Comments

5:00

JPY

Small Business Confidence (MAR)

50.6

7:45

EUR

French Production Outlook Indicator (MAR)

-6

French Business Confidence has been very positive as it has steadily increased by 13% per annum

7:45

EUR

French Business Confidence Indicator (MAR)

100