Talking Points:

Dollar Collapse Now Third Worst in Over a Decade
Euro Has Clear Levels but Can GDP Generate Breakout Velocity?
British Pound Extends Run Though Market Second Guessing BoE Hike

Dollar Collapse Now Third Worst in Over a Decade
The bleeding doesn’t stop. With Thursday’s close, the Dow Jones FXCM Dollar Index (ticker = USDollar) has dropped for 9 consecutive trading days. We have only seen this level of consistent bearish pressure for the benchmark twice before in the index’s history. Yet, it should be noted that the pressure behind the move is still lacking for conviction. The 126-pip decline through this move contrasts to the 173-pip drop in July of 2007 or the 302-pip plunge through May of 2006. The selling pressure is being felt across all of the major counterparts, but there is still a measure of obvious technical restraint for most (the exception being GBPUSD). The failed transition towards risk aversion is certainly an aspect of this move, but that driver was never truly realized. The greenback seems to be losing the persistent appeal of Taper speculation.

Euro Has Clear Levels but Can GDP Generate Breakout Velocity?
It seems appropriate that EURUSD has returned to 1.3700 – 2014’s general resistance for the benchmark pair – ahead of important Euro-area event risk. On deck we have the first measures of the 4Q regional GDP figures. Market participants don’t have to make many connections between this data and its influence on what truly sustains the region’s financial appeal. A sustained economic recovery can offer the necessary affirmation to policy officials to stay their hand on monetary policy (thereby encouraging market rates higher) while simultaneously stabilizing investors’ confidence in the tempestuous market backdrop. In the meantime, the ECB’s cut its 2014 CPI forecast from 1.5 percent to 1.1 percent; and Italy’s Prime Minister Enrico Letta resigned under renewed political pressures. The crisis fodder is there as long as fear is ignited.

British Pound Extends Run Though Market Second Guessing BoE Hike
Though it wasn’t achieved via the same fireworks that carried Wednesday’s rally in the wake of the Bank of England’s Quarterly Inflation Report, the cable managed to set a new multi-year high on both a close and intraday basis this past session. This was not a discrete move (driven by a fresh wave of demand) but rather continuation from the week’s top event risk. The question is whether momentum can hold out. Trading at multi-year highs, the conviction necessary to drive trends to new extremes is significantly greater than simply forging a rebound that fits within recent historical ranges. Traders clearly feel this drive is not meant to last. Looking at speculative positioning amongst retail traders, there is an extreme level of bearishness (See the regular positioning updates in DailyFX-Plus). A surge in short orders has pushed positioning to an incredible imbalance of 8.51 shorts for every 1 long GBPUSD trade. That is the largest disparity on recent record.

New Zealand Dollar: Foreign Holdings of NZ Bonds a Carry Appetite Measure
A hedge fund partner remarked Thursday that New Zealand looked like Ireland circa 2007. The market seems to have similar assumptions of the country’s outlook if the currency is any indication. Despite a robust rate forecast (pricing in 121 bps of hikes over 12 months and a certainty of a hike in March) and supportive risk backdrop via global equities, we have seen the kiwi struggle. We are seeing this lack of confidence start to show through in positioning. This morning, the RBNZ reported foreign holdings of the country’s government bonds fell to 63.7 percent in January – the lowest since November 2012. Far more dramatic (and timely) though is the retail positioning. Another incredible extreme, the short speculative interest has surged 190 percent over the week – setting the number of shorts-to-longs at 7.4 to 1.

Australian Dollar Jobs Tumble Cools, Bond Auction Meets Strong Demand
The Aussie dollar tumble that followed the surprise drop in January net payrolls and the decade-high in the unemployment rate (6.0 percent) cooled quickly. Given the weight of the data, the restraint is telling of the currency’s bearings. Looking to assess the market’s outlook for the possibility of further rate hikes to weaken the carry currency, swaps are still pricing in a positive 12-month outlook (11 bps of hikes) while the 2-year government bond yield is down 10 bps (to 2.78 percent) from its 10-month high over the past two sessions.

Yen Crosses Attempt Another Retreat as Nikkei Fades US Climb
The yen crosses were diving alongside the Nikkei 225 Friday morning. The move looked a lot like the move through the Asian session Thursday – which ultimately ended without the necessary break for follow through. Low volatility and an appetite for ‘risky’ assets is crucial to keep these crosses heading higher. Otherwise, investors will begin to question the tepid yield these pairs offer and the distinct lack of policy officials’ insistence that more stimulus is in the works. The IMF recently commented further QE from the BoJ was unnecessary, and we haven’t seen anything from the group to contradict this attack on speculation. Looking ahead, we have Japan’s 4Q GDP figures and a rate decision on the docket for next week.

Emerging Markets: Central Banks Holds Rates, Argentina Makes a Move to Transparency
While there were a few standouts this past session amongst the Emerging Market group for declines (the Russian Ruble and Indian Rupee among them), the bias was broadly bullish. Conditions have improved as the fear of capital flight has steadied alongside the traditional volatility measures. The situation seems encouraging enough that policy officials are taking moves towards transparency or avoided ‘accommodation’. The central banks for South Korea and Indonesia maintained their benchmark rates unchanged (at 2.50 and 7.50 percent respectively) presumably seeing little need to prevent capital outflow. Across the Ocean, Argentina updated its official CPI reading to a more realistic measure. The new calculation offered a January reading of 3.7 percent price growth on the month – December’s was 1.0 percent…

Gold Finally Overtakes $1,300, Investor Unwinding Slows
It has taken three months, but gold has finally made its way back above the $1,300 mark. Such a triumph for the bulls would normally be considered an occasion for a meaningful rally on the technical breakout. There was very little of that exuberance in this particular move though. The 0.9 percent advance on the day was enough to secure the technical progress but little more – notably, the 200-day simple moving average (SMA) stands at 1304. On the other hand, there are encouraging developments in certain accumulation measures. From futures, open interest (a gauge of participation) seems to have stemmed its plunge and held above the four-and-a-half year low set in October. From another derivative, ETF holdings of the precious metal have leveled out nearing the most stable levels since December 2012.
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