Dollar Leverages Gains on Mixed Risk, Equities Showing

Dollar Leverages Gains on Mixed Risk, Equities Showing
Euro: Is Speculation of an ECB Rate Cut Rational?
Japanese Yen Unwinds Gains as Market Hopes for More from BoJ
New Zealand Dollar Jumps after RBNZ Holds Rates, Is this a False Move?
Australian Dollar: Inflation Speeds Up but at a Slower Pace, RBA Reaction?
Canadian Dollar Climbs as Retail Sales Rise, Carney Maintains Hawkish Tone
Gold Calls a Halt to its Recovery Bull Leg, Next Move Needs Conviction

Range Trade Strategies work best in quiet market conditions – such as the Asia trading session

Dollar Leverages Gains on Mixed Risk, Equities Showing
We are seeing another serious fundamental divergence. The S&P 500 – as a benchmark for risk appetite – has charged higher for three consecutive days while the FX safe haven Dow Jones FXCM Dollar Index (ticker = USDollar) has closed at a fresh multi-year high. This hand-in-hand move breaks the normal conventions of capital moving into either high-return or safe assets. That said, it isn’t a particularly uncommon sight nowadays. There are some that think that this is a sign that the greenback is playing the role of a ‘carry’ currency, but themore plausible scenario is that risk trends themselves are not offering a strong and consistent drive.

Rather than relying on a single benchmark or two to establish a sense of the strength and bearing of investor sentiment, we should take the temperature of a cross-market drive across the market’s dominant asset types. If there were a strong bearing of ‘risk on’ or ‘risk off’, we typically expect equities, carry trade, speculative commodities and Treasury yields to all move in the same direction. The heavier the momentum behind the collective move, the greater the influence of sentiment. However the push to expose capital to greater return or flight to quality has been lacking for momentum as of late. Between uneven growth and the implicit vow by central banks to backstop risk taking, we have found an unsteady equilibrium. And, in the place of speculative appetite, we are left to catalysts like relative stimulus and short-term data sparks.

Taking the temperature of the dollar’s performance this past trading day, while the USDollar topped a new high; the greenback further managed a gain against all of its major counterparts. A surface-level interpretation of this move can be ascribed to confidence in the housing sector as new home sales rose (1.5 percent) and average annual sales price growth hit its highest level since 2006. More likely, the slow progression of benchmarking the end of QE3 purchases carries more weight. Meanwhile, an incidence this past session inadvertently reminds us of how tense the market is to an eventual swell in risk trends. An errant tweet through a hacked AP twitter account that explosions were reported at the White House presented a dramatic market reaction for equities and the USDJPY. Though quickly disarmed, we are left with a warning.

Euro: Is Speculation of an ECB Rate Cut Rational?
The euro took a spill against all but the Swiss franc through Tuesday’s session. Once ahead the newswires were active, but two particular themes stuck with traders. From the docket, the advanced reading for the April Eurozone PMI Composite – a timely proxy for GDP – showed an in-line 46.5 reading. Anything below 50.0 reflects contraction, and therefore this is a concern. However, traders were really focusing in on the German manufacturing read which dropped unexpectedly to 47.9. There is a two-speed economy in the Euro-region and Germany represents the ‘core’ – whose performance many believe has kept austerity in place and the ECB at bay. That said, if Germany is coming under pressure, there are some (like Pimco manager Bill Gross) who see the central bank finally flexing with a rate cut. A rate cut is more likely than a new stimulus program, but it is unlikely to help iron out underlying troubles long-term. The other headline worth keeping in mind was the Bank of Spain’s report of 1Q GDP. A 2.0 percent drop through the quarter is much worse than thought. Official stat office numbers come next week.

Japanese Yen Unwinds Gains as Market Hopes for More from BoJ
The Japanese yen’s effort to recover lost ground through the first half of Tuesday fell apart later in the session. USDJPY is drawn towards 100 and the other crosses are experiencing the same buoyancy. Key factors to this push are a stable risk backdrop (equities are moving higher even if the fundamentals differ from price), the Bank of Japan’s (BoJ) vow to drive implicitly drive the yen lower the proximity to such a dense level of open orders. Just as gold was facing a significant round of open interest below $1,525, USDJPY could easily trip a heavy round of orders with a forceful enough push. We are still a few days out from the BoJ rate decision, but speculation of using inflation guidance for more stimulus control is making the rounds. Meanwhile, both the OECD and Standard & Poor’s warned the country on its ballooning debt levels.

New Zealand Dollar Jumps after RBNZ Holds Rates, Is this a False Move?There was a measurable jump from the New Zealand dollar (kiwi) despite a questionable fundamental development. The Reserve Bank of New Zealand (RBNZ) announced that it would hold rates unchanged at 2.50 percent – as the market and economists had expected. Governor Wheeler suggested that growth figures domestically could benefit from trade partners’ performance, but he also stated rates would be on hold through 2013 and that the high currency overvalued as well as significant burden. Expecting bullish trend on this is unreasonable.

Australian Dollar: Inflation Speeds Up but at a Slower Pace, RBA Reaction?
In contrast to the New Zealand dollar’s reaction to the RBNZ rate decision, the Australian dollar’s response to the 1Q CPI report was surprisingly tame. The year-over-year, headline reading (we look at this measure as central bank’s base policy on it) hit a 2.5 percent pace. That is the fastest pace of growth since 4Q 2011. While that doesn’t turn us to hikes, it does make a strong argument for curbing further rate cuts.

Canadian Dollar Climbs as Retail Sales Rise, Carney Maintains Hawkish Tone
With the docket carrying more market impact, there was more for the Canadian dollar to move on Tuesday. For data, February retail sales impressed with a 0.8 percent swell which promoted the best two-month climb in consumer spending since 2011. That is encouraging when paired with BoC Governor Carney’s reiteration that the next rate move is likely to be a hike in Canada as consumer debt remains high.

Gold Calls a Halt to its Recovery Bull Leg, Next Move Needs Conviction
We have finally taken a break after a five-day advance from gold. Where we head from here is critical for assessing the medium-term trend for the precious metal. The longest advance this year was essentially a retracement of a record breaking tumble that took out 18 months of congestion. Yet, in that advance, bulls couldn’t even retrace half of the preceding losses. Meanwhile, ETF holdings of gold have dropped to the lowest level since October 2011. In April alone, interest has collapsed 5.8 percent (4.55 million ounces).
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