Talking Points:

Dollar At Risk of Tumble Awaits Next Risk Move
Euro: Speculation of New ECB Stimulus Growing
Yen Crosses Rebound as Volatility Trends Take a Breather

Dollar At Risk of Tumble Awaits Next Risk Move
The greenback is at risk of suffering a significant technical tumble and needs either a concerted risk aversion move or Taper-based yield swell to safeguard its three-month bull wave. This week, we have seen one of the most foreboding sentiment stumbles in months fail to generate a meaningful bid for the currency market’s traditional liquidity provider. Tuesday’s stabilization move fortified the S&P 500, but the recent positive correlation with the dollar notably faltered and left the latter benchmark behind. From the Taper front, both Chicago Fed President Evans (the group’s most dovish member) and Richmond Fed President Lacker both reiterated the policy authority’s position that a steady reduction in stimulus was the plan so long as conditions remain stable. Ahead, the ADP jobs changes and ISM service sector report will further this line.

Euro: Speculation of New ECB Stimulus Growing
Though there are few concrete means for measuring, there is a growing market contingent – analysts, economists, traders – that believe the ECB is preparing for a fresh upgrade to its monetary policy support. Justification for such a move is ample. Growth measures are bifurcated, market rates are rising and bank-level liquidity is draining as the LTRO program is paid off. While this is not an immediate threat, it makes the system exceptional exposed to any new issues – whether sovereign or financial sector related. And given the exit of two EZ members from their bailout programs (Ireland has emerged without a precautionary credit line) along with reports that Greece is in need of another stimulus program; the pressure continues to build. We will look more closely at the ECB’s options tomorrow in the lead into the policy decision.

Yen Crosses Rebound as Volatility Trends Take a Breather
With global equities balancing out Tuesday, the liquid FX market’s most risk-sensitive currency pairings would find a speculative bounce on the session. The AUDJPY and NZDJPY pairings put in for exceptional rallies (2.6 percent), but the other crosses were more restrained. This currency is exceptionally exposed to the sentiment connected to volatility and capital flows moving forward. In ‘calm waters’, investors are confident enough to feed the yen crosses higher against the backdrop of a stimulus-minded BoJ and an outlook for higher yields amongst the developed world. However, volatility would easily override the tepid carry and front-run appeal of these expensive crosses if it arose.

Australian Dollar Wins Biggest Rally in 8 Months After RBA Hold
Amid a rebound in risk sensitive assets, the Australian dollar was the best performer amongst the majors. This strong response to risk is quiet unusual as the AUDJPY’s (amongst the most risk sensitive pairings) correlation to the S&P 500 is a mere 0.28 (20-day, value-based) which is very week historically and thematically. Given that struggling relationship, we know the RBA’s hold on monetary policy had more than its fair share of influence in this move. While technically a hold, it was the nuance whereby the bias turned from dovish to neutral that struck FX traders. Like the Fed’s Taper or BoE’s writing off more gilt purchases is a precursor to rate hikes, this is a high-risk but early speculative sign.

New Zealand Dollar: Biggest Rally for NZDUSD in 2 Years a Coattails Move?
Though the Aussie dollar’s performance was slightly larger on a percentage basis Tuesday, the Kiwi dollar was the one setting the bigger records. Historically, NZDUSD experiences smaller daily ranges and volatility bursts; which is why the 2 percentsurge from the pair this past session was its best performance since November 29, 2011. And, this was not a move unique to the dollar-based major. The New Zealand currency rallied heavily against all of its counterparts – with the notable exception of AUDNZD. Traders are no doubt wondering whether this is an exhaustion move before reversal or catalyzing move towards a bigger rally. Bulls can point to the yield forecast – 100 percent probability of a 25bp hike in March – but those expectations were long priced in. Perhaps this was purely a follow move to the Aussie’s rally.

British Pound Struggling on Mixed Data, Precursor to Collapse in Rate Hopes?
There has been a notable collapse in breakdown in the consistency for UK data. And, that is a dangerous situation for the sterling considering much of its strength has been founded on the expectations of a near-term rate hike from the Bank of England (BoE). Attempting to correct the doubts that flooded the rate market following Monday’s disappointing January manufacturing report (a dip from three-year highs), the construction activity report Tuesday hit a six-and-a-half year high. The problem is that a housing boom is unlikely to shoulder a lasting recovery, and policy officials are likely to discount the sector – or even label it a bubble and thereby a problem. This morning, an industry inflation report (the BRC’s Shop Price Index) posted its biggest contraction – 1.0 percent – in the series’ record. Coming up, we have an important Service sector PMI report. Rate speculation may not be robust enough to weather another bad data print.

Emerging Market Post Biggest Rally in Two Months but is It Enough?
The MSCI Emerging Market Index rallied 2.0 percent this past session – the biggest rally from the benchmark ETF since December 6. Furthermore, the rebound generated the second biggest swell in volume for the index – following the January 29 collapse – in seven months. The FX market reflects the bounce in confidence. The majority of the liquid emerging market currencies rallied on the day with notable leaders including the South African Rand, Mexican Peso and Brazilian Real all posting over 1 percent gains versus the US dollar. Whether or not this is a lasting turn depends on underlying capital flows. Investors have seen just how small the exit can be and volatility is still buoyant.

Gold Stoic Through Data, Preparing for Another Breakout
We have seen ideal conditions for gold to perform in over the past few weeks. A distinct ‘risk aversion’ move by the global capital markets that drove capital out of risky assets like the Emerging Markets and low-yield carry trades stoked demand for safety. But it was the US dollar’s inability to capitalize on the trend that truly leveraged the commodity a fundamental value. Gold has slipped in its appeal as a safe haven, liquidity hedge and alternative store of wealth – a loss which has in turn driven the market down more than 35 percent from the record highs set back in 2011. Considering gold is struggling to gain traction despite rising issues with risk trends and inflation at the same time the dollar has floundered, we may be looking at an inherent bearish bias. This bias will soon be put to the test it seems. The metal has worked its way into another tight congestion pattern while volatility remains elevated and open interest in the futures market has dropped to a five-month low.
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ECONOMIC DATA

GMT

Currency

Release

Survey

Comments

0:01

GBP

BRC Shop Price Index (YoY) (JAN)

-0.7%

-0.8%

Index has remained negative since May 2013, falling to the lowest point last month since 2007.

-:-

Indonesia GDP (4Q)

1.7%

3.0%

Another possible Emerging Market spark