Talking Points:

Dollar’s Mixed Session Inches Currency Closer to Bull Trend
British Pound Generates Limited Rate Speculation from Uptick in Inflation
Japanese Yen: A QE Upgrade Requires a Collapse in the Crosses

Dollar’s Mixed Session Inches Currency Closer to Bull Trend

The Dow Jones FXCM Dollar Index (ticker = USDollar) is inching into breakout territory. However, the push seems to be more an indirect response to more motivated counterparts than a motivated move from the greenback itself. Looking at the performance docket for the day, the currency’s performance was mixed and tepid with an exception for the ‘commodity bloc’. The dollar advanced 0.3 percent versus the Canadian currency, 0.6 percent against the Kiwi and soared 0.9 percent at the expense of the Aussie dollar. Given the split, this may be another early sign of destabilizing risk appetite trends. These pairings are more familiar carry trades. As it happens, the yen crosses have similarly come under uneven pressure and global equities were on the retreat for the session to tip the scales back towards breakdown risk.

History – and many false starts – tell us that it isn’t good tradecraft to continuously position for the most dramatic scenarios. Yet, should risk deleveraging take, the cumulative impact on the market and trade opportunities will be substantial. The next steps to build momentum behind a flight vs fight response from the market ranks would be an S&P 500 slide below 1,865, a turn in implied volatility measures across multiple asset classes and an intensified bid for absolute safe havens (like the dollar and Treasuries). The quiet will eventually end – whether in an orderly or dramatic fashion. Even NY Fed President Dudley this past session noted concern over low volatility and surmised is may be a sign of complacency. On another central bank channel, the Senate voted to limit debate on Stanley Fischer’s nomination.

British Pound Generates Limited Rate Speculation from Uptick in Inflation

When a piece of important event risk reinforces the market’s expectations and traders are unable to capitalize, there is something amiss. That is the case with the UK inflation suite released this past session. Across the range of consumer, retail, factory and housing figures; the outcome was moderate. Speculators, however, were likely focusing on the CPI as they believe that would be the figure that would oblige the BoE to a more imminent rate hike. On that front, the headline 1.8 percent increase in the pace of price growth and the 2.0 percent core reading were higher than expected. Theoretically, that should shift the time frame forward – but by how much? Apparently not enough to further the sterling’s speculative run. That suggests expectations are likely close to being perceived as overdone. That adds weight to the upcoming BoE minutes (otherwise deflated by the Quarterly Inflation report last week) and UK retail sales ahead.

Japanese Yen: A QE Upgrade Requires a Collapse in the Crosses

Add AUDJPY and NZDJPY to the list of yen crosses that have taken out significant levels of support. You don’t have to be a technical trader to appreciate the circumstances in the transition from the crosses incredible run from the third quarter of 2012, to months of consolidation, to these tentative slips. Without the belief of a prominent intervention hand to drive the yen lower (Yen pairings higher), the market is less confident in its bullish capabilities. While a carry trade appetite will return eventually, these pairs are currently expensive relative to their actual yield and the danger from any risk aversion moves is too obvious for traders not to take seriously.

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Australian Dollar Breaks Lower as RBA’s Debelle Warns of Outflows

The Australian dollar was the worst performing major this past session. So far this week, it is down between 0.6 (AUDNZD) and 1.6 percent (AUDJPY). A mild correction put the market on edge and made otherwise mundane updates more substantial market movers. The RBA minutes released Tuesday morning reiterated a moderate dovish but neutral stance – seeming more dovish given the circumstances. The same for RBA Dep Governor Debelle’s suggestion that capital inflows would likely slow going forward. A bear trend requires something of more substance.

Euro Trouble Building as Stimulus Seems Certain, Periphery Yields Rising

Expectations for an accommodative ECB move next month are reach near-certainty levels. And yet, the euro and market rates are slow to adjust. Rather than doubt, this reflects an uncertainty as to what specific combination of tools will be employed. Outright asset purchases, specific lending programs, sterilization adjustments and traditional rate cuts are all options. Some would have greater impact on the currency and others on the economy. Meanwhile, the ‘risk’ capital inflow into the Eurozone is coming under pressure as periphery bond yields rise.

Emerging Market Currencies, Capital Market Benchmarks Drop

Emerging Markets weren’t able to escape the vacuum on risk trends this past session. The MSCI EM ETF dropped 0.8 percent on the day and all currencies – with the exception of the tepid 0.1 percent rise for the Russian Rubble – were in the red. Substantial declines for the Chilean Peso, South African Rand, Turkish Lira and Indian Rupiah reflects a broad mix more symbolic of ‘risk off’.

Gold Activity Level Drops to Four-Month Low

There are many ways to measure volatility and activity, but there are few better than those measures that are derived from price action themselves. From the average true range (ATR), we find that the past month – 20 days of trade – has generated the lowest level of activity from the commodity since January. That is not a surprise given the market’s inability to move beyond a $1,315 and $1,378 range. Given the lack of conviction and direction from this market, a catalyst for a tentative breakout doesn’t need to come from a systemic disruptor – like a global flight from traditional currencies. Meanwhile, trader interest continues to dissipate as the SPDR Gold Trust ETF reportedly saw assets dropped to a December 2008 low. That is more extreme than the total ETF exposure of 55.33 million ounces – an October 2009 low. **Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Comments

JPY

Bank of Japan Interest Rate Decision

0.10%

No changes expected. It is likely that BOJ will defer further stimulus until after this meeting, particularly noting that the first quarter GDP came in stronger-than-expected following the sales tax hike.

JPY

Bank of Japan 2014 Monetary Base Target

¥270T