Forex: Dollar, Equities Little Moved by Yellen Nomination for Fed Chair

Talking Points:

Dollar, Equities Little Moved by Yellen Nomination for Fed Chair
Yen Crosses Tumble Again, Not Yet Vicious Bear Cycle
Euro Traders, Rate Watchers Await Inflation Data

Dollar, Equities Little Moved by Yellen Nomination for Fed Chair
The US Senate confirmed Janet Yellen’s nomination to lead the Federal Reserve when Chairman Bernanke’s term ends on January 31…but should that comfort over-exposed investors? Even those that are skeptical of the direct relationship between loose monetary policy and the robust optimism in US and global capital markets these past years cannot discount that the external support has buoyed risk trades to some degree. What happens when the recognition of that backstop’s limitations becomes the consensus? We may soon find out.

Six months ago, the appointment of Ms Yellen to the helm of the world’s largest central bank – and its most fertile QE source – would have been seen as a ready-made argument for doves to project a boundless stimulus drive. And, that is the only ingredient necessary to keep equities on the rise and the greatest threat to a sustained dollar drive. However, the FOMC’s decision to Taper last month changes those assumptions. Already on the path to easing back the stimulus reins, Yellen is being seen clearly as a willing participant – maybe even an instigator – to the push to wind down. Meanwhile, we have comments like those from Philadelphia Fed President Charles Plosser (a voter in 2014) that are gaining more attention from the financial press and speculative circles. The central banker said this past weekend that he wants to end QE earlier rather than latter and sees no reason to speed up the pace of the wind down.

The more dramatic possibility from this change in tack is a cascading deleverage of low-yield-but-high-cost risk positions – distinctly dollar bullish. Yet, that would be a systemic change in the market’s belief system and thereby more difficult to reverse. That being said, the greenback’s safe haven appeal isn’t the only means of taking advantage. US Treasury yields and forwards rates are rising. The dollar’s ‘return’ appeal is rising at the same time the ECB and BoE outlook is growing cloudy.

Yen Crosses Tumble Again, Not Yet Vicious Bear Cycle
The first drop for the Nikkei 225 in 10 active trading days – also the biggest decline since October 25 – strong armed a uniform drop from the yen crosses Monday. That said, these sparks in risk have yet to catch fire. If the yen is to mount an enduring rally (yen cross plunge) and reverse one of the FX market’s most impressive trends; we need to hit the cadence of a vicious cycle. Market-wide repatriation and deleveraging is the most effective means for overriding the Bank of Japan’s handle on the exchange rate. Yet, it is also exceptionally difficult to instigate given global investors proclivity for complacency. Plainly speaking, a Nikkei dive towards 15,000 and S&P 500 tumble towards 1,800 would be a clear guide for a heavy turn. That is ‘watch the pot boil’ development however. In the absence of a unfavorable risk trends (and indeed even accounting for them), we can rank yen crosses for policy / yield divergences. The fundamental view of USDJPY is looking increasingly better than EURJPY.

Euro Traders, Rate Watchers Await Inflation Data
Europe’s economic docket was light through the opening 24 hours of the trading week, but it grows materially more incendiary in the coming session. Monday’s calendar offered a near-three year high in Eurozone investor sentiment and update to service sector activity measures. Ahead, we have German employment figures and European inflation statistics. The former is known for its short-term volatility impact should there be a meaningful ‘surprise’. The real fundamental weight though rests with the Euro-area CPI statistics. This report was the impetus in November to the ECB’s rate cut. Speculation of a new QE program from the central bank has eased since that cut, but its threat and the fundamental argument remain. If the specter of deflation grows as lending growth plunges, a stimulus move may be seen as more likely.

British Pound Yield Premium Drops From 2-Year High to 2-Month Low
UK data is starting to falter. For the British pound – riding high on booming interest expectations – this is a concern. Monday, the Markit service-sector PMI survey for December reported an uncharacteristic miss with a second slide from the activity report from its 16-year high set in October. Rate watchers are certainly starting to take note. As a consequence, the two-year gilt yield (the general time frame of the first BoE hike) has dropped 12 bps or 3.7 percent from its two-and-a-half year peak on December 27. In turn the UK-US 2-year yield differential has dropped back to 12.4 basis points from its own 2-year high. As that rate differential closes, the sterling’s appeal crumbles.

New Zealand Dollar: Rate Forecast Rising, Government Bond Yields Easing
Carry demand is not as easy to measure as some suppose. A rising yield can draw capital only so long as the acceptance of its commensurate risk keeps pace. Point in case is the New Zealand dollar. The 12-month rate forecast for the RBNZ (according to overnight swaps) is at a three-year high 126 bps. That said, the New Zealand dollar has yet to clear a rally versus the US dollar, Euro and pound.

Canadian Dollar Drops Across the Majors
The Canadian dollar was the worst performer of the majors to open the week. Despite that performance, the docket was relatively clear. Policy officials were there to talk the currency down though. Finance Minister Flaherty remarked that BoC Governor Poloz had forecasted further declines in the loonie’s value moving forward which would in turn help local manufacturers bolster their export orders.

US Oil Drops for a Fifth Consecutive Trading Day
US oil prices dropped for a fifth consecutive trading session. In the past 18 months, there have been four other bear waves of equal consistency; but no larger moves since May 2012. This move is more threatening given the steady rise in inventory levels and leveling off of economic growth and thereby demand. There are two things to watch here, the ‘energy complex’s’ decline and the US-UK (WTI-Brent) relationship.

Gold Suffers Intraday Crash to Start Off Week, Year
Gold traders felt a shiver of panic Monday. At 15:13 GMT, the precious metal 2.6 percent in less than a minute. CME circuit breakers kicked in to help prevent a panic selloff, but the exchange verified all the trades would stand – meaning this was no technical error. This may turn into one of those ‘flash crash’ rumor-based stories; but it is unlikely to carry forward much lasting influence on the metal.

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ECONOMIC DATA

GMT

Currency

Release

Survey

Comments

0:30

AUD

Trade Balance (Nov)

-250M

-529M

7:45

EUR

France Consumer Confidence (Dec)