Dollar Advances Fourth Time in Five Days as Dow Crosses 15,000

Dollar Advances Fourth Time in Five Days as Dow Crosses 15,000
Euro Torn Between Portugal’s Successful Return to Market, Background Fears
Australian Dollar Slides Towards 1.0150 Cliff after RBA Rate Cut
New Zealand Dollar Drops Sharply After RBNZ Says it Sold Kiwi
Japanese Yen High Enjoys Universal Strength Without Tangible Carry Unwind
British Pound Loses Ground to Euro, Dollar Despite Jump in 10 Year Gilt Yield
Gold Establishes Range between $1,490 and $1,440, Awaits Dollar

Dollar Advances Fourth Time in Five Days as Dow Crosses 15,000
The fundamentally, unnatural correlation between the dollar and capital markets continues. This past session, the Dow Jones Industrial Average closed above 15,000 for the first time in history. However, despite the implications this move carries for risk-appetite; the safe haven greenback was also up on the day. In fact, the Dow Jones FXCM Dollar Index (ticker = USDollar) has climbed four out of the past five trading session and is once again within striking distance of the mid-point (10,600) of the benchmark’s range over the past decade. As discussed before, this is not evidence of the dollar changing its role as a safe haven. We are seeing what happens when there is a lack of conviction in risk-based trends. More importantly, we are seeing evidence of severe inconsistencies as traditional benchmarks (equities, high-yield, etc) hit extremes.

In a world where value is relative, it is possible to see strength in the dollar measured in the weakness of its counterparts. That is certainly an element of the currency’s current strength. Where the greenback was previously at the top of the scale for damaging stimulus efforts by its native central bank (the Federal Reserve), we find today that the market has efficiently priced in the region’s open-ended stimulus effort and has moved on to discounting the more novel developments from Japan, Europe and other key regions. Yet, the dollar’s obstinate buoyancy carries a more remarkable anecdote for investors in all assets: that there are limitations to blind risk taking. Disturbing imbalances have shown up in every corner of the market. In contrast to the equity benchmarks hitting record highs, market-wide rates of return have dropped to record lows. Demand for ‘insurance’ products to protect against adverse market moves have plunged. Yields on high-risk paper have dropped below those for better collateralized and stable debt. Central bank stimulus has driven market participants to chase returns wherever they can and cast caution to the wind. Yet through it all, the liquidity and stability of the US dollar and its markets remains a beacon for the leery.

Euro Torn Between Portugal’s Successful Return to Market, Background Fears
The euro is still suffering for its yield hit from last week. The European Central Bank’s (ECB) rate cut carries little support for the Eurozone in the form of greater borrowing amongst individuals, sovereign market access or economic growth; but it certainly undermines an already anemic yield. Market-based rates (Euribor) have shown the effects of the easing and now stand at just a few basis points above absolute zero. There is little chance that officials will encourage market recovery through investor confidence as there is little return to be found even from this risk-laden region. And, this is an inconsistency that will look to be only further exacerbated after ECB President Draghi’s comments from yesterday that data over the next weeks will be weighed to assess the need for future easing – weeks suggests the policy authority won’t wait to see ‘the effects of this past rate move’. Meanwhile, on a positive note; the excessive appetite for yield has helped expedite Portugal’s return to the market. The country received demand for more than three times the €3 billion in 10-year debt sold (the first serious auction since April 2011). We shouldn’t take this or the 86 percent foreign take for face value, but it has helped a bailed out region meet all its funding needs for 2013.

Australian Dollar Slides Towards 1.0150 Cliff after RBA Rate Cut
We have seen AUDUSD move to the well-tested floor of its 10-month range at 1.0150 (if you think there is a breakout, use the DailyFX Breakout 2 Strategy to confirm) following the Reserve Bank of Australia’s surprise rate cut Tuesday morning. This is the fifth, 25bp rate cut from the policy authority over the past 12 months and the immediate volatility following the event as obvious. Yet, the selling pressure on the Australian dollar fell well short of making the upgrade to systemic trend shift. The short-term reaction was a consequence of a significant majority of the market not expecting the outcome. Swaps showed such an outcome was around a 50/50 probability and economists were far more surprised. That said, the floor of the AUDUSD’s prominent range held. A record low benchmark rate for the Aussie currency certainly hurts its appeal; but in an environment where the market seeks yield at any risk, it doesn’t completely undermine the currency. That responsibility falls to risk trends.

New Zealand Dollar Drops Sharply After RBNZ Says it Sold KiwiHearing monetary officials’ assessment of future financial risks only matters so far as it sets up a probable change in policy going forward. The Reserve Bank of New Zealand (RBNZ) released its Financial Stability report Wednesday morning, and the assessment spoke to rising risks to the housing sector, need for banks to raise capital holdings by September and the lamentation of a high currency. None of this moved FX traders though. That is until central bank Governor Wheeler said explicitly that the RBNZ sold kiwi dollars in the open market. Again, shock factor was good for a sharp kiwi response. Yet, the group tried before and failed. The bank is just too small to play half-hearted counterpart to the BoJ.

Japanese Yen High Enjoys Universal Strength Without Tangible Carry Unwind
The Japanese yen was higher against all of its major counterparts this past session – another unusual performance given the strength is US equities as a benchmark in risk trends. A lack of true demand for richly priced ‘higher yield’ positions speaks to the concerns about market performance bubbling just under the surface of the multi-year or record highs from the Dow or Nikkei 225. This morning, BoJ Governor Kuroda made sure to tend to his yen efforts by reassuring his presence – while vowing it isn’t his intention. He had better hope carry appetite holds.

British Pound Loses Ground to Euro, Dollar Despite Jump in 10 Year Gilt Yield
The sterling was a mixed back this past session. The currency enjoyed strength against the Aussie and kiwi dollars, but dropped against all of its other liquid counterparts. Given the unique event risk of the former two, this is likely a reflection of inherent weakness for the pound. That may seem surprising considering gilt yields were higher (showing market demand), but yields were actually higher globally.

Gold Establishes Range between $1,490 and $1,440, Awaits Dollar
Gold made another effort to break below $1,440 this past session and failed. We have fully formed congestion between this floor and $1,490 as immediate support – indicating that the easy drift in retracing the massive losses from April 12 and 15 is over. To spur the metal on a break that introduces a new, lasting trend; we need a fundamental jolt. Given the saturation of stimulus – and market’s acclimation to it – the greater risk is to find a significant dollar jump that diminishes the need for an alternative asset. As it happens, risk aversion is the best way to spur this.
**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

ECONOMIC DATA

GMT

CCY

Release

Survey

Comments

CNY

Exports (YoY)

10.00%

Previously trade deficit since 2/12; With lower manufacturing and service PMI, China’s recovery may need to rely on export to meet growth prospect, trade surplus is AUD positive.

CNY

Imports (YoY)

13.00%

14.10%

CNY

Trade Balance (USD)

$15.50B

-$0.88B

7:15

CHF

Consumer Price Index (MoM)

0.10%

0.20%

SNB will remain its policy to combat deflation by capping the franc at 1.20, unless consumer price index rises to positive territory and its economy shows signs of significant improvement.

7:15

CHF

Consumer Price Index (YoY)

-0.50%

-0.60%

7:15

CHF

CPI – EU Harmonised (YoY)

-0.30%