Talking Points:

Dollar Advances Despite Tempered Growth as Rate Outlook Builds
Euro Drops on Lending Data, Inflation Data to Draws ECB Attention
Yen Crosses Try to Recover as Risk Lingers, Data Weighs QE Need

Dollar Advances Despite Tempered Growth as Rate Outlook Builds
Despite a rebound in equities, the US Dollar offered up a strong performance through this past session. In fact, the 10-day rolling correlation between the greenback and benchmark S&P 500 (a favored risk appetite measure) is 0.71 – a strong, positive relationship. There is growing skepticism over the dollar’s traditional place on the risk-reward scale. Yet, regardless of whether the currency is warping its natural response to ‘risk on’; it is a significantly bullish evolution for a currency that would otherwise drop under the weight of its safe haven status. Under this current dynamic, the dollar stands to appreciate gradually in fair market weather and surge forward should panic drive capital into the Treasuries and other deeply liquid US markets. But where has this appetite for the dollar come from?

Though we have not seen a full-scale deleveraging of the ‘risk’ trade with the Federal Reserve’s momentous change in its policy regime – given the initial Taper in December and confirmation that the QE3 program would be steadily worked off with the subsequent move this week – the market has seen the implications this carries for growth and yields. A decision to slowly reduce the external safety net for the US economy and capital markets is a sign of confidence in the economic recovery. Supporting that view this past session, the first reading of US 4Q GDP was released to a tempered but healthy 3.2 percent annualized pace – in line with expectations. This data was further encouraging when it was reported that consumer spending proffered its biggest boost to growth in three years. This looks like a serious anchor for the global economy and tangible advantage heading into a period of uncertainty.

Another way the dollar’s shift on currency spectrum has projected an advantage is through interest rate expectations. Though the Fed is still ‘de-escalating’ its stimulus program, the market is already starting to assess the eventual shift towards rate hikes. Surprisingly, overnight index swaps reveal that the market is actually projecting a rate hike within the next 12 months (pricing in 30 bps worth of tightening). That may ultimately prove overly optimistic / bullish; but as we close in on the time frame, the outlook for tightening will solidify. Week-to-week data and policy commentary is important for speculative bearings under these circumstances. Therefore, next week’s NFPs will be a key update. But, in the meantime, the fringe risk of a market-wide risk shock will stand as a potent bullish scenario for this dormant safe haven.

Euro Drops on Wavering Capital Flows, Inflation Data to Draws ECB Attention
A sharp drop for the Euro this past session seems to run afoul of the data that was on the economic docket. For the ‘core’ Eurozone assessment, German unemployment dropped more than five times faster than expected. The 28,000 new jobs found in January was the biggest jump since September 2011, and the 6.8 percent jobless rate matches a multi-decade low. Meanwhile, investors that have plowed capital into the ‘periphery’ breathed a sigh of relief when Spain reported 4Q GDP met expectations of a 0.3 percent period of growth – the strongest since 1Q 2008. Yet as encouraging as this data is, recognition of heavy capital inflows and a steady fall in lending are gaining greater prominence. Ahead, we have key important January Eurozone CPI figures – a precursor to next week’s ECB decision.

Yen Crosses Try to Recover as Risk Lingers, Data Weighs QE Need
The yen crosses stabilized this past session, but the recovery effort is uneven. The persistent, bearish drive for the Japanese currency starting back in September of 2012 under the auspices of a massive BoJ stimulus program is suffering more frequent breaks. As sizable as the program has been and despite the rising forward rate expectations of the majors, the market is still reticent to sustain the next bull leg. Expectations of a follow up QE expansion in April – previously baked-in – may be easing. CPI this morning hit a five-year 1.6 percent and wage growth is lagging.

New Zealand Dollar: Market Sees a 100% Probability of a March Hike
Following the largely expected hold by the RBNZ Thursday morning, expectations of an imminent hike have moved from 35 percent (the assumption heading into this week’s meeting) to 100 percent (fully pricing in a move at the March meeting). Speculation of a monetary policy move is frequently far-more market-moving than the change itself. Yet, this past session, the New Zealand dollar dropped against all but two of its major counterparts. There has been significant yield speculation priced into the kiwi, and traders are growing impatient for vindication.

British Pound: Is There Enough for the BoE to Contemplate Next Week?
There has been a tremendous commotion in the market with regards to the Bank of England’s monetary policy. Investors interpreted the central bank’s forward guidance literally; and now there is a serious discrepancy between the market’s expectations and BoE’s guidance for timing the hike. The policy authority is unlikely to move rates next week at their meeting, but could they use the opportunity to salvage their credibility?

Australian Dollar Rebound Follows, Outpaces Equities
A rebound in equities Thursday inspired the Australian dollar to the same – an impressive performance given the disappointing Aussie (HIA home sales and inflation) data as well as the downwardly revised Chinese manufacturing PMI. The most ‘over-extended’ markets often rebound first and the Aussie may be moving into this category. Perhaps the RBA will inspire something more next week.

Emerging Market Currencies Split Thursday, Funds Report Massive Outflow
Bold moves by Emerging Market officials to stem the dramatic outflow of capital that has plagued the economic class recently seem to have taken the edge off of the rising panic. Yet, the steps don’t seem to have fully soothed fear. Capital curbs and rate hikes threaten local growth and leave a stain of uncertainty. Meanwhile, Lipper reports capital outflow from US-based EM funds hits a three-year high $2.6Bln.

Gold Suffers Biggest Drop in 6 Weeks on Risk, Dollar Bounce
A pullback for the EM volatility index (from a four-month high) and jump for the US dollar translated into a double hit for gold Thursday. The precious metal dropped 1.8 percent ($23.32) – the biggest tumble in six weeks. This is even more significant move considering it has pulled the market back from a slow-motion, bullish trend reversal. Despite the move, both volume and volatility for the commodity moderated.
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ECONOMIC DATA

GMT

Currency

Release

Survey

Comments

0:05

GBP

GfK Consumer Confidence(Jan)

-12

-13

Actual: moved to its highest since Sept 2007

0:30

AUD

PPI QoQ(4Q)

1.3%

Actual: QoQ PPI Print has been positive since Q1 2012

0:30

AUD

PPI YoY(4Q)

1.9%