Talking Points:

British Pound Heads into 4Q GDP on a Rate Hike High
Dollar Losing Safe Haven Traction as Emerging Market Pressure Eases
Euro Holds Despite Renewed Greece Tension, Wavering Investment Appetite

British Pound Heads into 4Q GDP on a Rate Hike High

Top event risk for the coming 24 hour period goes to the British pound. On the UK docket for the upcoming session, we have the fourth quarter (4Q) GDP release. This is a particularly meaningful piece of event risk as its economic breadth and natural media-impact can generate substantial interest rate speculation. Yield forecasts have arguably stood as the pound’s strongest fundamental driver over the past six months – a period in which the currency has rallied between 14 and 3 percent against all of its counterparts. Changes in rate speculation can be more influential than current rates as capital moves to take advantage of the further inflow expected as higher returns are realized. Yet, has the market over-extended itself in its sterling expectations? While buoyant CPI levels and an unemployment rate that has dropped to within arm’s reach of BoE’s forward guidance target, the central bank will likely attempt to change expectations. A ‘disappointing’ GDP could ease their effort.

Dollar Losing Safe Haven Traction as Emerging Market Pressure Eases

The dollar’s rebound Friday didn’t last very long. With the intensity of the recent risk aversion winds fading Monday, the greenback’s safe haven status cooled. Fear has not completely passed over the market, but the threat of an imminent crisis no longer dangles over the market. For the dollar, crisis equates to liquidity demand – the currency’s last bastion appeal. In the currency’s performance through the opening session, we see the hallmark of a risk rebalance as the high-yield currencies (Aussie and Kiwi) advanced alongside the hawkish leaning British pound, while the fellow ‘safe havens’ and troubled currencies (Euro and Loonie) eased. The market may keep this holding pattern until the FOMC.

Euro Holds Despite Renewed Greece Tension, Wavering Investment Appetite

Systemic concerns to the Eurozone’s health aren’t as infectious as they used to be. There were a few notable concerns arising over the opening session of the new trading week, and yet the Euro tended to perform along the traditional ‘risk’ lines. From the docket, the only indicator of merit was Germany’s IFO business confidence report for January. The survey’s forecast measure bested expectations with a near-three year high. Confidence in the regional economy’s best positioned member economy though seems to carry little status for the broader Eurozone. More pressing, a study by the OECD suggesting EZ banks face a total capital shortfall of €84 billion made the rounds, the Finance Ministers meeting showed there is still a standoff on Greece and ECB member Knot remarked no further easing is needed for money markets Saturday.

Yen Crosses Rebound as Most Risk-Sensitive Rebound

The yen crosses are among the FX market’s most risk-sensitive currency pairings. Given their exceptionally low carry, up to 45 percent advance over the past 18 months and clear dependency on an escalating stimulus effort by the Bank of Japan; a stable backdrop for risk appetite is exceptionally important to maintaining the status quo bull trend. As such, the recent volatility in the financial markets has unsettled traders. Against the increased headwinds to traditional risk trend flows, the monetary policy authorityhas kept noticeably quiet on plans for further stimulus. Meanwhile, despite the yen’s universal depreciation in December, the month’s trade deficit widened to -¥1.302 trillion.

Australian Dollar Day’s Best Performer as Chinese Financial Fears Abate

Amongst the majors, the Australian dollar was the best performer on the day Monday. The strongest performance was measured against the fading rate forecasts of the Canadian dollar, while its most restrained advance was established versus the robust outlook and preoccupation of the British pound. This performance was in part a rebound from pressured risk currencies while also having its roots in more tangible fundamentals. This morning’s business confidence report extended an existing bullish lean. The origination seemed more rooted in the country’s Chinese connections. Australia’s primary trade partner saw its capital markets steady on reports that a 3 billion yuan trust that was on the verge of default had resolved investors’ claims and averted knocking over that first domino in China’s financial markets.

New Zealand Dollar Rate Expectations Suggest Market Open to Bullish Surprise

We are just over a day out from the RBNZ’s rate decision Wednesday (an hour after the FOMC decision), but the market doesn’t seem to be doing much to price in the projected rate hikes that Governor Wheeler offered late last year. In fact, since the central banker set the stage for ‘225 bps’ worth of hikes ‘over the next 9 quarters’, the currency has put in for a very spotty performance. Over that time, the kiwi has done well versus its Canadian (+4.4 percent) and Australian (+3.1 percent) counterparts. Yet, it is virtually unchanged versus the anemic yields of the Dollar, Euro and Yen. Despite the central bank’s heavy, hawkish lean; the Kiwi dollar is treading water. Perhaps a sign it is undervalued.

Emerging Markets: Argentine Peso Stabilizes, Outflow Continues for Others

Though it didn’t suffer the same pace of collapse as the last 48 hours of this past week, the MSCI’s Emerging Market Index continued its bearish phase with a third consecutive daily decline to a near five-month low. Meanwhile, the sector’s volatility measured nudged slightly higher to a four-month high 9.8 percent. This is a bigger picture reflection of an important, risk-sensitive segment of the market that has cooled its breakneck pace of collapses; though has notably not reversed course. Perhaps the most prominent story was the Argentine Peso’s virtually unchanged level Monday – a far cry from the 13.2 percent single-day loss versus the USD Thursday. The rudder to stabilize the market was new monthly limits on dollar purchases to a fifth of a worker’s monthly wages. These capital controls do little to encourage foreign investment or repatriation though. Meanwhile, the Brazilian Real lost 1 percent versus the dollar, Indian Rupee 0.7 percent and Indonesian Rupiah 0.5 percent.

Gold Suffers Second Biggest Drop of 2014 as Liquidity Risk Subsides

The difficulty with escalating the recent risk aversion theme into one of genuine liquidity concern is undermining gold’s bullish performance. Though the precious metal managed to closed out Friday with its fifth consecutive weekly advance – the last run of this consistency was back in September 2012 before the long bear wave began – the conviction behind the is certainly lacking. The 1 percent drop from the metal Monday once again maintained an unusual, positive correlation with the US dollar. Both are suffering from the same fundamental circumstance. One is a target for capital flows for liquidity (the greenback) and the other is considered an alternative to fiat when there is a high probability of systemic manipulation (gold). With the worst offenders in the Emerging Market set settling, gold’s problems once again outshine its unusual appeals.

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