Talking Points:

Dollar Hits One-Month Low Despite Biggest Drop for Stocks in Months
British Pound Readies for Heavy Round of Inflation Data, Rate Speculation
Yen Crosses Face First Serious Bear Wave in Three Months

Dollar Hits One-Month Low Despite Biggest Drop for Stocks in Months
The dollar’s performance Monday was not befitting of a safe haven currency…that is if the recent stumble in sentiment is legitimate. One of the market’s most persistent (complacent?) asset classes – US equities – dove to open the week. The S&P 500 dropped the most in two months (1.1 percent) while the Dow Jones Industrial Average suffered its largest slide since early October (1.1 percent). Given how unusual it is to see equities stumble, the move did not go unnoticed by risk watchers. And yet, the implications of stimulus-supported benchmarks slipping despite ‘favorable’ data (poor NFPs this past Friday) didn’t seem to run deep enough to leverage the greenback’s safe haven status.

True ‘risk aversion’ is a measure of scale. When the masses are more concerned about what provides the best liquidity and thereby safety rather than what rate of return can be yielded, the scales have shifted towards fear. Under those circumstances, the world’s most broadly held reserve currency is prized for its safe haven status as all other concerns are overlooked. It is clear that we have not hit that extreme. However, we are certainly moving further away from the opposite end of the spectrum where moral hazard wills markets higher. What is important for dollar traders – and truly participants in all markets – is where on this scale we are and whether we are still moving along it.

Monday, global equities dropped sharply, volatility measures inflated and the yen crosses (carry trade) made opening technical moves towards reversal. Yet, we’ve seen plenty of uniform corrections in sentiment that last for little more than a day before reverting back to the prevailing trend. As always, follow through and conviction are far more important to this equation than the technical breaks. While this week offers a number of noteworthy indicators and pieces of event risk, there isn’t any one item that looks like it can turn the tide all on its own. That means the equilibrium between optimism and pessimism would have to be decided by a cumulative and perhaps volatile majority shift. Meanwhile, the greenback seems to be burdened by Friday’s weak NFP showing and subsequent drop from Treasury yields. A rally in Treasuries (fall in yields), however, does not immediately translate into long-US stimulus speculation. The Fed has signaled its turn to Taper, and the burden is now on preventing further moves. So what about those yield losses? The market also buys Treasuries when it is uncertain of global financial stability…

British Pound Readies for Heavy Round of Inflation Data, Rate Speculation
The sterling dropped across the board Monday. The currency’s losses ranged from a 0.6 percent slide against the weakened US dollar to a hefty 1.8 percent plunge versus the yen. There is certainly an element of the pound’s position in the risk spectrum that contributed to its retreat, but the poor performance against the greenback and more risk-leaning currencies suggests there was something more pervasive at work. The indicator on the docket was the little-followed Lloyds Employment Confidence survey for December – which actually approached a five-year high. The material development was the extended retreat in Gilt yields. While the UK government bonds hold a safe-haven status of their own, it is materially more restrained than Treasuries; and more importantly, the pound has been driven to considerable heights on rate expectations. As the 10-year nears 2.8 percent, traders are holding their breath for the round of inflation data due today – headed by the December CPI.

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Yen Crosses Face First Serious Bear Wave in Three Months
Monday marked both the first three-day drop for USDJPY since before the Fed’s Taper announcement December 18 and the biggest single-day decline since September 18 (notably the day the FOMC deferred an expected Taper). The Japanese currency advanced against all its major counterparts, suggesting there is a material risk of a bigger correction. What could counteract expectations of a major upgrade to the BoJ’s open-ended stimulus program in the coming months? Volatility that leads to capital losses that easily overwhelm nonexistent carry.

Euro Yield Outlook Softening, Market Sensitive to Trichet Commentary
The euro weakened against most of its counterparts through the week’s opening campaign. The calendar was light and European equity indexes fair remarkably well given the general sentiment behind global financial markets. For those weighing relative monetary policy, European market rates have softened recently and certainly curbed their advance. Ahead, we have ECB President Trichet speaking on the Troika’s performance.

New Zealand Dollar Rallies After Business Sentiment Hits 20-Year High
It is somewhat refreshing to see a currency respond plainly to a scheduled piece of event risk. The New Zealand dollar leveraged a measurable advance against all of its counterparts after the release of the NZIER business sentiment survey from early this morning. The net 52 percent of respondents expecting improvement is the highest position for the indicator since 2Q 1994. That will help rate hike expectations.

Australian Dollar: 10-Year Yields Drop Below 4.2 Percent
Speaking of yield forecasts, the Australian dollar is struggling to leave behind the stigma of the rate cut regime that the RBA just recently called to a close. The country’s 10-year yield has extended a tumble from its January 6 peak to a 5.3 percent slump below 4.2 percent. That doesn’t serve a wayward carry currency very well. Many may be bidding their time to the Aussie labor stats, but watch for Chinese data without a time.

US Oil Fails to Establish Recovery as Volume Falters
US-based crude prices have not won a two-day advance since December 27. The commodity dropped 1 percent through Monday’s session as aggregate futures volume dropped from last week’s swell. For those monitoring speculative positioning for signals, the COT figures showed last week that the net bullish exposure in futures dropped 6.8 percent (24,278 contracts) – the biggest correction since the final week of June.

Gold Hits a Four Week High as Futures Traders Cover Shorts
A relatively modest 0.4 percent advance on the back of Friday’s 1.7 percent rally has pushed gold above $1,250 for the first time since December 11. The dollar’s recent weakness is playing strong influence on this metal’s performance; but the bullish bearing is measurable against all the majors. Looking to ETF holdings, the first uptick in two months is nowhere near indicative of a change in interest. That said, the COT’s speculative positioning statistics show futures traders added to the long position for a third consecutive week.**Bring the economic calendar to your charts with the DailyFX News App.

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