Talking Points:

Dollar Rebound Begins Slow, Looks to Risk and Taper for Fuel
British Pound Tests Rate Forecast Again on Jobs Data
Yen Crosses’ Climb Post BoJ Stalls Quickly

Dollar Rebound Begins Slow, Looks to Risk and Taper for Fuel
Having broken its oppressive 10-day consecutive decline on Monday, the Dow Jones FXCM Dollar (ticker = USDollar) is not attempting to mount an offense. Yet, as we have seen often enough in these markets, a break in the trance of persistent trends is not enough to fundamentally change the bearings and pace of the markets. As is usually the case, this counter trend requires a lightning rod for bullish conviction. It could find it easily enough from underlying risk trends or perhaps a renewed affection for Taper / interest rate timetables. Yet, we need market turmoil to bolster these themes to the headlines and start the ball rolling.

Given the positioning of risk trends, the dollar’s safe haven appeal retains the greatest potential (though perhaps not probability). The rebound for speculative appetite shortly after the January 29 FOMC Taper has exercised all of the ‘fear’ premium that was built into the S&P 500’s 6 percent retreat from record highs. Yet there is a critical difference between unwinding excess risk premia and engaging in a meaningful trend. The former scenarios runs out of drive quickly while the latter can sustain itself to fresh highs/lows – such as the equity benchmark passing record highs at 1,850. There are plenty of ‘possible’ catalysts to sour sentiment, but nothing that is imminently menacing. Yet, rather than obscuring the chances for a new risk-based trend; this actually helps foster a new move without distraction.

Keeping a wary eye on the hotspots in the financial system (equity indexes, leverage, high-yield, Emerging Markets, etc) is critical for any dollar trader moving forward; but it isn’t the only fundamental theme to monitor. From the more pedestrian market themes, the docket offered some unsettling updates for US markets. The top release was the TIC Flows report – the measure of inflows and outflows of capital for the US. A $45.9 billion capital hemorrhage was unexpected and the biggest loss for the contained system since February 2009. Notable selling of agency debt (such as MBS), equities and Chinese Treasury holdings doesn’t clash with general risk trends through the month. Ahead, we have housing data, Fed speeches and the FOMC minutes; but the real agitator will be Thursday’s CPI release.

British Pound Tests Rate Forecast Again on Jobs Data
The Sterling can’t catch a break. Once again, the currency stands as the most exposed major to impending event risk. This past session, the headline was the UK’s January round of inflation data. While there was growing pressure in housing (ONS) and factory-level prices, the policy-important CPI reading issued a notable drop. The headline reading unexpectedly ticked down to a 1.9 percent year-over-year pace. That is the first time since November 2008 that the inflation benchmark has fallen below the Bank of England’s (BoE) target. In the push-pull of fundamental drivers for monetary policy, inflation pressures are the most important factor for the eventual rate hike. The upcoming employment figure may not hold the same status for the central bank, but it has been the primary source of hawkishness for the market. If it disappoints…

Yen Crosses’ Climb Post BoJ Stalls Quickly
There was little doubt the market interpreted some measure of ‘devaluation’ for the yen in the Bank of Japan’s policy decision this past session. The yen crosses uniformly jumped higher after the central bank announced that it had kept its monetary base target unchanged at ¥270 trillion, but the extension and upgrade to three loan programs smelled like new stimulus. In reality, the one-year extension and increase to two of the schemes was not an increase in the total stimulus offering – merely an upgrade to its distribution. FX traders realized that quickly after the news. And, as BoJ Governor Kuroda backed away from tangible threats, doubt once again crept in for stimulus that can offset anemic carry.

Euro Climbs Despite Sentiment Concern, Ebbing Speculative Appetite
Despite the persistently unflattering headlines, the Euro remains stubbornly buoyant. This past session, the ZEW investor sentiment surveys for February reported a sharp drop in the German economic outlook and the first drop in the Eurozone’s assessment in 10 months. Adding to this picture, US money market funds – a source of considerable liquidity – reportedly cut their exposure to the European financial institutions by 18 percent in December. Follow the money with the euro. Should the capital stream into EU periphery debt reverse, the currency will slide.

New Zealand Bull Trend Slipping as Rate Outlook Softens
Though it has struggled to capitalize on it, the Kiwi has enjoyed its status as the highest carry currency amongst the majors with the most hawkish outlook. That forecast has slipped though recently. The New Zealand 10-year yield halted a climb with an as much as 0.8 percent slide this morning – trading towards the bottom of its six-month range. Meanwhile, the 12-month rate forecast is 14 bps down from its peak.

Canadian Dollar Attempts recovery Through Unflattering Data
Carry currencies draw little appeal if they can’t attract capital. It seems Canada is struggling to entice foreign investors as the December International Securities Transactions report conveyed a C$4.28 billion outflow of capital from the country. Without a meaningful platform for recovery, USDCAD and AUDCAD reversals are going to struggle for traction. Wholesale trade sales figures are due Wednesday.

Emerging Markets on Their Back Foot Led by China Volatility
The Asian, Eastern European and South American emerging market currencies reported a uniform retreat versus the US dollar this past session. In turn, the MSCI Emerging Market ETF notched a 0.9 percent drop of its own – even as the sector’s volatility reading extended its retreat. Through social turmoil (Ukraine) and rate cuts (Chile and Hungary), China’s credit market wobble is a flashing risk concern.

Gold Rally Finally Meets Hesitation, Dollar a Risk to Bull Trend
A 0.5 percent drop from spot gold Tuesday was the metal’s second decline in 10 trading days and the largest in 14. This is far from a convincing turn of the recent bull run to multi-month highs, but it does give us cause to look more critically at the fundamentals carrying this commodity. Extreme risk aversion is not on tap and inflation fears are still in check. Physical demand from Asia and via global jewelry interest is also softening. This is not a good backdrop for bulls. If the dollar makes a more serious play for a rally, this gold run will be in jeopardy.
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