Talking Points:

Dollar Extends Slow Advance after ADP, Bullard Comments Stir Bulls
Euro: Such Certainty in ECB Outcome Exposes Risks
Yen Crosses Advance Extreme by Fundamental and Technical Measure

Dollar Extends Slow Advance after ADP, Bullard Comments Stir Bulls
Across the majors, the dollar was up against all of its counterparts with the exception of the Australian dollar. As such, the equally-weighted Dow Jones FXCM Dollar Index (ticker = USDollar) advanced for the second session. Yet, the lack of progress in this move certainly left bulls wanting. Momentum is difficult for this benchmark currency to muster given the backdrop conditions. Relegating the greenback to its ‘safe haven’ status would clash with the inordinate strength of the yen crosses and record highs from the S&P 500. If it were a connection to rate forecasts – and therefore yield support – we have an important March employment report due on Friday. That said, two-year Treasury yields did advance this past session as the ADP payrolls printed in-line and the Fed’s Bullard remarked that he expected the first hike in Q1 2015.

Euro: Such Certainty in ECB Outcome Exposes Risks
We should never be certain of anything when it comes to trading. Yet, looking at the market’s and economists’ assumptions for the upcoming European Central Bank (ECB) decision, a policy hold seems fully priced in. According to Reuters and Bloomberg polls, economists see approximately a 95 percent probability that the central bank will hold once again and avoid any change to its interest rates. Market measures – like overnight swaps – are reflecting much the same. That is telling of how this event will likely influence the market depending on its outcome. If there is a move to increase accommodation – a benchmark rate cut, deposit rate cut, end to bond sterilization, a new lending program – the market will have to adjust for the slip in market yields which would see the euro down. Then again, the ‘status quo’ option won’t simply be the end of this issue. President Draghi will speak 45 minutes after the announcement, and he can still keep the stimulus door open.

See my outlook for the different ECB scenarios and the preferred Euro pairs for the different outcomes in today’s Strategy Video.

Yen Crosses Advance Extreme by Fundamental and Technical Measure
Whether we are measuring it on a technical or fundamental basis, the run on the yen crosses is exceptional – and likely extreme.A five-day and 200-plus pip run from USDJPY is noteworthy but 10-day consecutive rallies for AUDJPY and CADJPY are excessive. Counterarguments made through fundamentals – whether on following capital market risk trend measures or on the foundation of more stimulus – come with their own impediments. The conviction in speculative appetite is dubious across the capital market structure. Yet for these FX favored carry trades, the backdrop is even more suspect given the exceptionally low level of carry they provide. Meanwhile, those that are hanging their hat on expectations for more BoJ manipulation through a stimulus upgrade – the consensus is now for no new QE this month.

British Pound Tests Mettle Against Another Round of Data
Data this week out of the UK has proven unflattering for interest rate expectations and therefore the British pound. This past session, Markit’s construction PMI survey for March reinforced the slip measured in Tuesday’s manufacturing report. The building measure printed an unexpected contraction to 62.5 and kept the sector from reviving its return to cycle highs. These are small – but consistent cuts – to resolute rate forecasts that the sterling has advanced on. We’ll put hawkish expectations to the test again today with service PMI and credit conditions surveys.

Australian Dollar Rally Stalls Despite Continued Equity, Yield Climb
The Australian dollar managed gains against all its major counterparts Wednesday, but the progress was infinitesimal. There is still exaggerated focus on the Aussie currency’s position as a long-term carry trade, and thereby confusion given the sustained advance for global equities. Yet, the correlation between stock indexes and pairs like AUDUSD has withered over the past few years. More appropriate to the currency’s performance to this point is the rebound in rate expectations – founded on a shift from expectations of further RBA cuts to a neutral standing. The 2-year government bond yield has pushed a fresh 12 month high and the 10-year yield is up another 0.7 percent, but skepticism and a gaudy appetite for outright yield mutes this progress.

Canadian Dollar Rebound at Impasse on Upgrading Trend
Over the past two weeks, the Canadian dollar has marked an impressive recovery. However, we have come to the point where traders are wondering whether this is a mere correction in a larger bear trend or a correction of greater substance. Often times, market momentum and even yield forecasts simply require a small push to set a cycle of follow through. We will have two opportunities to decide the next move for the loonie over the coming 24 hours. In the upcoming session, the February trade report is due; and the consensus is for a modest C$200 million surplus. Canada has struggled to maintain a meaningful surplus since the beginning of 2012. Certainly packing more punch will be Friday’s labor data run. There two consensus is for a significant improvement.

Emerging Markets 10-Day Run Matches Most Consistent Rally in a Decade
The incredible bull run continues. Though it was a modest 0.2 percent advance – the weakest of this run – the MSCI Emerging Market ETF nevertheless closed green and notched its 10th consecutive advance. That matches the September 11 run – the rebound from the dramatic capital flight from India – forthe strongest performance in a decade. The comparison draws the necessary conclusion. We are witnessing a recovery from panic in the emerging market world that was last month building behind fears founded in Crimea, Venezuela and other hotspots around the world. Like the S&P 500, we must question the conviction behind this move. While a reverse in the current of capital outflow certainly generates a bid, it is not the impetus for a lasting trend – merely a speculative endeavor that quickly runs out of steam.

Gold Rebound Met by a Collapse in Volume
This past session offered some relief to gold’s aggressive, two-week tumble – though it may prove just a modest breather. Spot prices rose 0.9 percent this past session for the biggest advance since the metal put in its peak for the year (March 14). Yet, in another instance where direction is struggling to find validation in conviction, participation in the correct was notably tepid. Looking to the derivatives market, the SPDR Gold Trust ETF recorded its lowest level of volume (4.91 million shares) since March 10 while aggregate futures volume on the COMEX dropped to around 120,000 contracts. A fundamental spark is needed to turn hesitation into opportunity for bulls. Though an unexpected outcome, a renewed push for stimulus from the world’s second largest central bank – the ECB – could feed the fire.**Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Comments

0:30

AUD

Retail Sales s.a. (MoM) (FEB)

0.3%

1.2%

Although key data such as retail sales may impact near term price action, fundamental shifts will be looking to the RBA and Australia CPI figures.