Talking Points:

Dollar Run Cools as Liquidity Fills Out…But it Doesn’t Turn
Euro Struggling to Match Pace of Local Capital Markets
British Pound Drops after Mixed Data, GBPUSD Faces 1.6800

Dollar Run Cools as Liquidity Fills Out…But it Doesn’t Turn

The dollar is doing well in the face of an ostentatious risk run. Against the backdrop of an S&P 500 drive to record highs and a fear gauge anchored to seven-year lows, the greenback’s hold this past session on the back of a two-week advance speaks to a certain level of stability. So long as this traditional safe haven currency is able to weather the headwinds of the current swell in speculative appetite, it is in a good position. That is because moving forward, an eventual change in market tack can amplify the dollar’s more favorable traits. On the risk front, a natural reversion in activity levels (volatility) is likely to revive volume which can quickly transition into a seeming ‘risk aversion’ assessment. In the meantime, rate expectations have progressed little despite a strong showing in consumer sentiment, service and composite PMI, and housing data this past session. Ahead, a 2-year floating rate Treasury auction may give us a better reflection of the market’s Fed expectations.

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Euro Struggling to Match Pace of Local Capital Markets

European capital markets extended their impressive bullish breakout with broad – if more restrained – follow through. Yet, the Euro seems to be drawing limited strength from the capital market performance. The MSCI European Index rose a fifth consecutive day to a six-year high while volume was notably mute. In contrast, the currency lost ground against most major counterparts. There are two important factors for the Euro: an international speculative demand that prizes the high returns in the post-Eurozone Crisis era and expectations for the ECB’s monetary policy bearings. Appetite for returns in Euro-area assets still finds favorable conditions with the leading move by local equities and the climb for periphery bonds. On the other hand, the expectations for monetary easing are a growing current. Short-term market rates are rising as the ECB balance sheet starts a slow turn. Ultimately, there is more excess premium in the euro than untapped potential in its capital markets.

British Pound Drops after Mixed Data, GBPUSD Faces 1.6800

A light docket wouldn’t keep the pound from volatility this past session. The sterling dropped against all of its major counterparts with the exception of the Swiss franc Tuesday. On the interest rate front, neither bond yields nor rate swaps were showing pressure on the buoyant BoE forecast. On the data front, the docket was rather light. The third consecutive drop in monthly BBA home loans is a growing case for concern for a sector (housing) that has drawn a lot of attention, praise and skepticism. Another highlight was the CBI’s quarterly sentiment survey for the service sector. A record high is encouraging for both growth and hiring expectations – services account for three-quarters of UK jobs.

New Zealand Rate Forecast Still Calling for Hikes, But Least Hawkish in 7 Months

The RBNZ has hiked rated twice in the hawkish regime it began just this past March. Yet, since that first hike, the kiwi dollar is lower against three majors (AUD, CAD and GBP) and is little changed against the US Dollar and Japanese Yen – notable funding currencies in the carry trade game. This absolute lack of appetite for yield in a market that is otherwise desperate for return is striking. Rate expectations and verbal threats against the exchange rate have been remarkably effective here. Looking to swaps, the 12-month rate outlook has retreated to 79 bps of cumulative hikes – the lowest since early November.

Chinese Yuan Tumbles Despite Rising Yields

With both carry trades and Emerging Markets in retreat, it comes as little surprise that the Chinese Yuan / Renminbi – which fits both categories – posted its biggest decline in seven weeks. However, there is something more systemically interesting behind this move. A short USDCNH position was a favored global macro position for years as investors looked to collect carry on a pair that was being held to a steady course by central bank intervention – the PBoC allowing for a controlled depreciation to quiet claims of exchange rate manipulation. That trend has changed as the economy started to hit some road bumps. A retreat in Chinese yields (2-year government) synced up to the Yuan’s own struggle. Yet, now that fundamental relationship is diverging. As the currency pushed new highs, yields are at three-month highs building.

Emerging Market Currencies, Capital Markets Tumble Despite Developed World Equity Charge

Another remarkable divergence in the ranks of the risk sensitive: the Emerging Markets tumbled through the past session. For the market group, the MSCI Emerging Market ETF toppled 0.9 percent to further retreat from the six month high set last week. A caveat to the move was the mild volume behind the selloff and the still-anemic levels of volatility for the segment – just around 7 percent. On the FX side, there was a broad drop from these high-yield, high risk currencies. Some of the more liquid currencies on the lam were the Indian Rupee (-0.5 percent); Russian Ruble (-0.6 percent) and Turkish Lira (-0.9%). The biggest drop was suffered by the South African Rand which tallied a 0.92 percent decline. Adding to the general distaste for EM, the South Africa 1Q GDP reading was a deeper-than-expected 0.6 percent contraction– worst since 2009.

Gold Posts Heavy Breakdown Under Tension

It was inevitable. The trading range for gold – measured by the average true range – dropped to its lowest level since October 2010 Monday as volume was building for weeks. In other words, the market was becoming more active at the same time it was running out of room. That is an unmistakable combination for an unavoidable breakout. And, break the metal did this past session. The 2.2 percent ($27.85) plunge was the metal’s largest in six months – specifically December 19 when the market established a low and subsequently turned to its 2014 bull trend. This is not an ‘exhaustion move’, so it doesn’t suggest the same seismic trend change as the December move. On the other hand, this swell in volatility strays outside the broad market conditions seen elsewhere. If a dollar rally or sustained risk rally doesn’t step it, it is likely to stall.**Bring the economic calendar to your charts with the DailyFX News App.

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