Dollar Tumbles…Before the Fed and GDP

Talking Points:

Dollar Tumbles…Before the Fed and GDP
Euro Shows Increasingly Little Concern Over Greek Risks
New Zealand Dollar Faces its Own High-Profile Rate Decision

It isn’t unusual to see key technical levels and patterns develop in the lead up to critical event risk. Speculative positioning reflecting indecision and anxiety usually fits the classical chart patterns we come to expect for breakouts. Yet, it isn’t often that the key move from the market occurs before the data crosses the wires. That is what happened to the Dollar this past session. Having already transitioned from a nine-month climb to an extended period of consolidation, bullish ambitions looked winded and desperately in need of reinforcement. The combination of Wednesday’s 1Q US GDP report and the deliberations of the FOMC rate decision could have provided the potent mix necessary to revive the flagging bid or signal a fundamental shift that gave definitive reason for throwing in the hat and sparking a lasting reversal. Yet, the tension seemed to push the Greenback to make a move before the catalysts were read. That does not mean that the move has been decided however. Reversal or revival may still depend on this key mx.

Beyond the position of the Dollar before its release, the mix of event risk we are heading into is critical because of the market-moving themes they tap into. Over the past year, we have seen FX volatility rise and remain elevated where other asset class’s activity measures have deflated once again (though not to last summer’s extremes). We have also seen extraordinary trends where many other asset classes have lacked for direction – much less momentum. The deciding factor between currencies and other asset classes is the sensitive to the initial phases of monetary policy divergences. Even in a zero interest rate environment, the contrast of the ECB’s QE program to the Fed’s open discussion of when to lift from zero represents a definitive advantage. And, for event risk that can meaningfully alter rate expectations, nothing competes with the combination of a quarterly growth report and the central bank’s policy statement with its decision.

Between the two key events, the GDP report is more ‘black-and-white’. An outcome that is in-line or weaker than the 1.0 percent pace forecasted would be considered reason enough to push back the ‘mid-2015’ time frame that was interpreted as a June or July hike. A ‘better’ reading will struggle against the recent swell in bearish bias that comes with Tuesday’s break. The FOMC decision is the more complicated element in this equation. This was always expected to be a decision that would pass with no change. However, in the rhetoric of the statement, we will find the market interpreting the chances that the Fed will act in June versus September versus December. June is a low probability scenario now, but if the comments are surprisingly hawkish, it could revive hawks’ claims. More likely the sentiment softens with recent data. If it doesn’t, the dollar could recover ground quickly.

Euro Shows Increasingly Little Concern Over Greek Risks

Greek government bond yields have dropped, its credit default swap premiums have tumbled and the Athens Stock Exchange has soared this past week. And yet, the country’s financial issues have not been resolved. The market is growing increasingly blasé over the threat this country poses the Eurozone – perhaps because contagion risk has been reduced. Traders should watch the in-person meeting scheduled today.

New Zealand Dollar Faces its Own High-Profile Rate Decision

Though most eyes will be fixated on the FOMC rate decision coming up, we are more likely to see a significant change from the RBNZ decision due shortly after the US event risk. This past week, the Assistant Governor for the central bank reiterated some concerns about economic and financial conditions while also suggesting a rate cut is an option. If those sentiments are shared by the RBNZ as a whole, the Kiwi could stumble.

British Pound Anxiety About Next Week

We had a high-level UK indicator cross the wires this past session, but that didn’t seem to sooth anxiety about what still lies ahead. According to the National Statistics office’s numbers, the economy grew 0.3 percent in the opening quarter. That was weaker than the 0.5 percent forecast but the annual pace is still enviable on a global basis at 2.4 percent. But bullish or bearish, that doesn’t absolve next week’s election risk.

Australian Dollar Rallies But Without Guidance

The Australian Dollar was the best performing major this past session with gains across the board. For some pairs – AUDUSD and AUDJPY – the advance was significant enough to clear critical levels of resistance. But what was the foundation of the move? What inspired it? Aussie and Chinese data was uneven, risk appetite absent, the iron ore connection weak. Without strong motivation, follow through will be difficult.

Emerging Markets at Seven Month Highs Before Fed

Emerging markets have posted an exceptional recover these past months. For the MSCI EM ETF, that has meant a strong rebound to seven month highs. Having set a new high just this past session, we now move into a key development that can tell us whether foreign investors will remain comfortable parking their funds in this high-return / high-risk regions: US jobs and policy. If a hike is still coming, EM will feel it.

Gold Recovery Looks for a Serious Dollar Spill to Feed Appetite

As an inflation hedge and disconnected safe haven, gold is finding very little interest in the global financial system. However, as an alternative to devalued currencies, there is a growing appetite. The ECB’s QE program alongside a mature BoJ effort and hints of PBoC efforts add to the appeal. The clutch support for an anti-currency appeal though rests with the Fed. Will the group quell fears of higher yields?

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ECONOMIC DATA

GMT

Currency

Release

Survey

Comments

22:45

NZD

Trade Balance (MAR)

300M

50M

The market will focus its attention to the RBNZ rate decision later on at 21:00 GMT.