Talking Points:

Dollar Posts Fourth Measured Advance after Data Feeds the Taper
British Pound Breakout Building Alongside Gilt Yields
Euro Unfazed by Weak PMI Data, Spain Long-Term Debt Sale

Dollar Posts Fourth Measured Advance after Data Feeds the Taper
In the green through early trade Friday, the Dow Jones FXCM Dollar Index (ticker = USDollar) is working on its fifth consecutive daily advance. If we close this final session for the week in the green, it would be the first drive of this magnitude since the run through November 1 – notably, the beginning of a multi-month bull leg. Yet, consistency is not a complete measure of conviction. The drive behind this upswing is as subdued as the decline that preceded (a 10-day slide that covered only 160 points). A failure of this recovery and shift to more meaningful lows would require either the Fed abandoning its Taper ambitions or global capital markets embarking on a participation-heavy asset build up – low probability scenarios. Alternatively, a persistent speculative deleveraging is the best medicine for a dollar rally – probable but elusive.

British Pound Breakout Building Alongside Gilt Yields
Though a universal decline against the majors, the pound’s losses this past session were rather modest. Doubt over the Bank of England’s (BoE) rate ambitions may be gnawing at sterling bulls who have driven the currency higher over the past 8 months, but it the issue isn’t severe enough that rate hawks are having to abandon their positions. That may change soon. Following up on the uptick in the jobless rate and softening of inflation this week, we have heard BoE members reinforce the ‘2015 is a reasonable time frame’ mantra. Pound traders should keep an eye on 2-year Gilt yields. A tenor that matches the time frame for the first hikes, these yields look prone to a technical break.

Euro Unfazed by Weak PMI Data, Spain Long-Term Debt Sale
The Euro was little changed this past session, but that counts as a ‘strong’ performance given the fundamental developments on the day. The most accessible news on the day was the unexpected drop in the Eurozone’s February PMI figures (a leading growth reading) and the sharp miss in consumer sentiment survey for the same period. These are ultimately pullbacks in broadly improving trends, so the Euro impact remains reserved. A more remarkable measure of conditions was Spain’s auction of 5, 10 and 30-year bonds. The debt sale was met with strong demand expected with yields at six-year lows. Appetite for yield is driving capital to periphery Europe, and that may not change until risk falters.

Yen Crosses Shelve Reversal as Volatility Fails to Take
A tentative rally from the Japanese yen Thursday morning failed to take and reversal from the crosses reverted to congestion. As has been the case for months, the currency is following two prominent trends: carry appetite (a result of risk trends) and BoJ stimulus. On the former, the equity-based VIX Volatility Index barely bounced before it grew winded, and the impetus to deleverage expensive carry trades faded. Far more concerning for long-term yen cross bulls though should be the change in momentum from the Japanese central bank. The open-ended QE has helped lift inflation, but it is having limited success in sustaining growth. Meanwhile, record trade deficits, a loss of domestic purchasing power and impending tax hike are creating a dilemma for the need and efficacy of more support. Are the costs of stimulus matching its benfits?

Canadian Dollar Top Market-Mover Potential with Data Ahead
Friday’s economic docket is relatively light Friday, but the Canadian dollar certainly pulls its weight during the lull. The 13:30 GMT simultaneous release of December retail sales and January CPI will give both an economic activity and inflation read for policy officials. The Bank of Canada has pulled the ‘carry outlook’ rug from under the loonie, and the bleeding will likely only be staunched when the potential for tightening is once again on the same level as the RBNZ or even RBA. Neither report is expected to offer bulls/hawks much relief. In the week ahead, the weight of the data picks up noticeably with the fourth quarter GDP and current account balance due.

New Zealand Looks to Another Round of Important Data before RBNZ Hike
We are just under three weeks out from the Reserve Bank of New Zealand’s next policy decision. Yet, despite a near-certainty amongst market participants (96 percent according to swaps) and economists (14 of 15 polled by Bloomberg) that this event will end with a 25 bps rate cut to 2.75 percent, the New Zealand dollar is lower versus nearly every one of its counterparts over the past week and month. Interest rates are certainly a key pricing instrument for currencies, but this is also a forward looking market. Looking to swaps, we know the markets have been pricing over 100 bps worth of hikes 12 months out since mid-December. Unless the pace of the tightening is seen accelerating or the first moves are realized, the early adoption gains are potentially priced in. In the week ahead, fresh updates to the 2-year inflation outlook, trade and housing activity can at least shape the pace of the upcoming tightening cyle.

Emerging Markets Calendar Fills Out with GDP, Rate Decisions Next Week
A cursory look at the Emerging Market currencies this past session showed some sense of relief. The most sensitive of this grouping posted gains against the greenback as the ‘fear’ premium – the same in volatility measures – eased back. Yet, this is far from a systemic change. While the financial fear surrounding countries like Argentina, Venezuela and Ukraine have ebbed, the risks are still palpable. Looking ahead to next week, one eye should also be kept on our favorite ‘risk’ barometers as global volatility in capital flows is one of the Emerging Market’s greatest risks; but there is more tangible event risk to account for just ahead. The health of the developing world’s economies and financial markets has been peddles as a top priority for the G20 gathering in Australia – though policy that alters our course is unlikely. Later on, we have a docket packed with GDP readings (from Brazil, India, South Africa) and rate decisions (Brazil and Colombia).

Gold and Silver Runs Turn to Consolidation
Last week, gold posted an incredible 4.1 percent rally while silver surged 7.3 percent – the largest advance from both since the week of August 16. Yet, the lack of a tangible fundamental current via anti-dollar, anti-inflation or anti-risk appeal seems to have left the commodities to drift just as hopes for more a more structural bull trend have been stoked. Looking at ‘participation’ figures for the more costly metal, futures volume has failed to reinforce the 2014 upswing and open interest continues to carve its general trend towards 5-year lows. Potential remains should Emerging Markets destabilize, another wave of global stimulus awash the market or the Dollar post a make a move on mutli-month lows; but those are not high probability events. If gold is to return to $1,500 – much less $1,900 – a dramatic change is necessary.
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ECONOMIC DATA

GMT

Currency

Release

Survey

Comments

9:00

EUR

Italian Consumer Price Index- FOI ex Tobacco (JAN)

107.1

The prior YoY print was the worst since 2009.

9:00

EUR

Italian CPI – EU Harmonized (YoY) (JAN F)

0.6%