Talking Points:

Dollar Notches 8th Decline for Worst Stumble in Nearly 6 Years
British Pound Posts Its Biggest Rally in Months, But Is This Momentum?
Australian Dollar Tumbles after Unemployment Rate Hits 10-Year High

Dollar Notches 8th Decline for Worst Stumble in Nearly 6 Years
The Dollar keeps notching records…unflattering ones. With the Dow Jones FXCM Dollar Index (ticker = USDollar) closing down another 15 points just above the 16,000-level, the benchmark has extended its slide to an eighth straight trading session. This painful decline matches the worst performance for the benchmark since July of 2007. That said, of the only six times in the Index’s history that it has posted bear waves of this consistency, this is the ‘weakest’. Through this decline, the USDollar has shed only 102 points. This compliments the deceleration of global equity indexes as their ‘rebound’ hits levels that venture into the outright ‘bull trend’ category. There is a considerable difference between corrections and true trend – one of conviction, momentum and potential follow through.

Risk trends are the immediate concern for the greenback as the pressure is palpable. Equity indexes across the globe have put in for flattering rebounds as the ‘risk premium’ fed into the volatility measures (like the VIX) were worked off. From traders, the ambitious speculative shorts disarmed while the aggressive bulls bought the biggest dip in months. Yet after the Nikkei 225 retraced 38 percent of its January declines, the FTSE 100 covering 65 percent of its tumble and S&P 500 winning back 78 percent; the ‘low hanging fruit’ was picked. To carry further, conviction needs to find a foothold. From the docket, there is little ahead that touts the kind of sway to inspire new risk positions or to force the deleveraging of existing exposure. The most media-friendly event – Fed Chair Janet Yellen’s scheduled testimony before the Senate Banking Committee – has been postponed due to expected inclement weather. For Data, the January retail sales figures on deck. However, these stats have limited scope when it comes to altering broader risk trends.

British Pound Posts Its Biggest Rally in Months, But Is This Momentum?
As expected, the scheduled event risk for the pound this session would prove a serious market-mover for the currency…even though the outcome obscured the outlook for rate watchers. Back in August, the Bank of England introduced forward guidance with a distinct declaration that the UK’s benchmark lending rate would not be lifted until the unemployment rate pulled back to 7.0 percent. Yet, the then-7.8 percent jobless measure deflated far more quickly than the policy authority had expected. Where the BoE set an estimated return to the rate hike conversation sometime in the first half of 2015, last month’s 7.1 percent reading seemed to demand an immediate response from the central bank. The market had built up a considerable yield position on the belief that the distant hike would come sometime this year.

Governor Carney answered the call for clarity with obfuscation. Rather than change his target for the key labor figure, he noted that the benchmark was merely an objective and not a ‘trigger’ and suggested the actual decision on a rate hike would be made using a multitude of indicators – including inflation. This vagary makes the outlook for monetary policy more difficult to speculate on, and that could curb the yield drive the pound has enjoyed to this point. Yet, then why did the currency enjoy one of its biggest and broadest rallies in months after this development? A strong growth forecast update and Carney’s stammering does indeed move forward that first hike. But just the first.

Australian Dollar Tumbles after Unemployment Rate Hits 10-Year High
The Australian dollar suffered a massive hit to open Thursday’s trading session. The monthly labor statistics are a market-moving series for the Aussie currency; but when there is a tremulous rate forecast in at stake, its importance is magnified. The 3,700 net jobs lost through the past month (against a 15,000-gain expected) was a relatively modest decline, but the jobless rate more than made up for it. The 6.0 percent print was a tick higher than expected and boosted the unemployment level to its highest in a decade. This is a serious hurdle for the currency to finally find traction on speculation for its first rate hike timeframe. The 6 bp drop in the 2-year yield (to 2.81 percent) reflects this.

Euro May Regain Fundamental Strength if ECB Continues to Write Off Deflation
The case for a fresh round of preemptive stimulus from the ECB that seemed so strong after the November rate cut and even the December hold is quickly evaporating. This past session, multiple ECB members (including Coeure and Hansson) talked down the risk of deflation – one of the few official justifications of preventative QE. Without stimulus to curb rates, the euro will rely on general risk trends and the yield reach.

Yen Crosses at Risk of Reversal as Equities’ Recovery Slows
Alongside the notable deceleration in equity indexes’ rally, we have seen the risk-sensitive yen crosses similarly lose their momentum. Three months ago, a market that was unfettered by general sentiment issues would see these pairs continue their rise on the outlook for more stimulus. Yet, that forcible yen-devaluation expectation is cooling. The IMF recently remarked further easing from the BoJ wasn’t needed.

US Oil Fails Again to Overtake $100
Crude briefly rallied above $101 Wednesday, but the drive was not to last. When US liquidity hit its stride, the US Department of Energy released its inventory and demand figures for the week through February 7. Supplies swelled more than expected (3.267 million barrels) though implied demand jumped from a three-month low (to 15.594 million barrels a day). With an equity drop adding to the mix, the outcome was clear.

Emerging Markets Leverage the Recent Period of Calm
Risk premium in the Emerging Market seems to be deflating. The region’s volatility index continues to retreat from its five month high and the MSCI ETF is keeping its positive bearings. Policy officials seem to be taking advantage of this. Slovenia sold $3.5 billion in bonds and Turkey auctioned a bond with record maturity. Meanwhile, South Korea felt comfortable holding rates. But is this a permanent calm?

Gold Advance Ends in the Same Manner it Unfolded – With Little Conviction
After five days of advance, gold finally posted a red bar. Yet, the $0.28 dip was hardly a dramatic reversal signal. Nevertheless, the modest check was appropriate for what we have seen of the advance that preceded – lacking of conviction. The $1,300-level looks far away under these circumstances. With global inflation risks cowed, risk trends steady and the dollar holding 10,600; there isn’t much drive here.

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