Dollar Restraint While S&P 500 Collapses – What Does it Mean?

Dollar Restraint While S&P 500 Collapses – What Does it Mean?
Euro at Risk of Breakout as ECB Policy Decision Approaches
Japanese Yen Suffering the Tension Between Stimulus and Sentiment
British Pound: The Bank of England Has a Serious Chance to Surprise, Though Will Not
Australian Dollar Extends Plunge, AUDUSD Down Over 1,000 Pips from April 11
Canadian Dollar Takes in Business Sentiment, New BoC Governor Speech
Gold: The First Increase in ETF Gold Holdings in 18 Days Not Bullish

Dollar Restraint While S&P 500 Collapses – What Does it Mean?
After four years of consistent speculative escalation behind ‘risky’ assets like the S&P 500, is faith in stimulus finally starting to crumble? If so, the bubble behind equity and other speculative assets presents a serious opportunity for safe havens like the US dollar. Typically on the opposite ends of the spectrum, the equity and FX market benchmarks have instead run on similar paths through 2013 – leading many to believe that one or both had changed their fundamental bearings. Yet, this unusual relationship does not reflect a role change for either, simply a lack of influence through that particular aspect – risk on / risk off. Under that logic, the extremely threatening move that the S&P 500 made this past session – a drop back to its 50-day moving average, seven-month trend floor and near 5-percent retracement threshold to 1,600 – should inspire the greenback to revive its role as ultimate safe haven. That said, the Dow Jones FXCM Dollar Index (ticker = USDollar) was little changed this past session having actually slipped 0.1 percent. This tells us that we are the verge of a seismic change, but we aren’t there yet…

There is a technical, market condition and fundamental view of why the critical rebalancing of sentiment has yet to be made by the market. For the highly-visible S&P 500, the painful slump has taken us to the brink (trendline, moving average, retracement milestone) but not officially broken support. Through market conditions, we have yet to see all those assets with either a definable ‘risky’ or ‘haven’ quality– nearly all liquid securities – fall back into the singular line of reasoning. Fundamentals is the aspect where we can best derive the disconnect and establish a time frame for when it will present itself. If the masses really wanted a reason to fall into line with risk trends, there is plenty to rationalize it: market yields are just off record lows, leverage usage is at a record high, participation is at a 15-year low (financial futures), asset prices are at a record highs, etc. However, there is a well-established trend and high-level of confidence in the Fed and central banks to keep volatility under wraps. And, while sentiment can often generate its own momentum once engaged; it may need a push to initiate the turn.

An ‘overvalued market’ may simply be too vague to encourage many investors to abandon the market – unless a deep technical correction presents significant enough losses. The most effective means of breaking the speculative fever is to remove the infinite support – taper stimulus. This past session there was some modest speculation on the subject as the ISM service sector report (the United States’ largest sector) offset the manufacturing slump with a firm read that tempers the need for external support. While notable, this data is too far removed from the taper debate to provoke commitment. Friday’s NFP report is targeted. Could the market wait for the jobs report? Perhaps the Fed meet?

Euro at Risk of Breakout as ECB Policy Decision Approaches
EURUSD has worked its way into an exceptionally tight trading range just before heavy event risk. The probability of a breakout is exceptionally high. In the upcoming session (11:45 GMT specifically), the European Central Bank (ECB) will announce the most recent round of monetary policy. The consensus heading into the event is that that the group will leave the benchmark and deposit rates unchanged while all additional, exceptional policy moves are similarly left off the agenda. For those that remember the last meeting (where they cut rates), it is reasonable to be ready for the ‘unexpected’. Changing the rate is ineffectual for long-term euro influence and financial recovery. To truly hit both planes, they would need to introduce something akin to an open-ended and active stimulus program. They have the OMT, but it isn’t used until a full blown crisis is upon us. The probability is low, but there has been talk of SMEs, ABS quality assessments and structural recession risk.

Japanese Yen Suffering the Tension Between Stimulus and Sentiment
The financial situation in Japan is set to only grow more – not less – complicated. In an effort to beat deflation, the BoJ and government are inadvertently eroding real rates of return for a market that is heavily invested in local assets. Add to that the inherent battle that the authorities have to wage against risk trends. A collapse in sentiment will spur a carry trade unwind on yen crosses with record low yield differentials that subsequently opposes exchange rate progress. And, then there is the growing currency war discontent. Destined for trouble.

British Pound: The Bank of England Has a Serious Chance to Surprise, Though Will NotThere is even less credibility given to the Bank of England’s capacity to change monetary policy than its Euro-area counterpart – and for good reason. The Monetary Policy Committee (MPC) has held both rates and stimulus unchanged for months with a recent minority calling for more gilts purchases falling well short of the necessary vote. This particular meet is Governor Mervyn King’s last at the helm, and it would be ungentlemanly to shock the system before Marc Carney steps in. However, we should always be open to the unexpected.

Australian Dollar Extends Plunge, AUDUSD Down Over 1,000 Pips from April 11
AUDUSD has made a provocative move below 0.9550 support at that dates back to October 2010 – and that isn’t the only Aussie-dollar based cross that is showing the currency suffering. A few other statistics to truly appreciate the scope of this move: this is the fifth consecutive week of decline (four other instances in the past decade and no six-straight weeks) and the two-month loss for AUDUSD is now over 1,100 pips.

Canadian Dollar Takes in Business Sentiment, New BoC Governor Speech
There is some notable event risk on the regular docket for the Canadian dollar tomorrow, but it is unlikely to truly generate volatility. The Ivey PMI is a business activity report that gives a good growth view of an important sector. The real point of interest is the first formal speech for Stephen Poloz as the new head of the Bank of Canada. Will he keep the same tightening mindset as his predecessor?

Gold: The First Increase in ETF Gold Holdings in 18 Days Not Bullish
ETFs actually increased their holdings of gold this past session. That is the first increase in 18 trading days – ending the second longest run of purging on record. That said, the increase was a measly 480 ounces to the total 68.86 million ounces on account. From the December 20 record high holdings of 84.64 million ounces, stock has fell 18.6 percent. And, so we are given scope of the situation. This is not a bullish move in itself. The tightening range on price though should draw our interest. The ECB can join the FX-devaluation game or we wait for NFPs and taper talk.

**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

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